Deere & Company
One John Deere Place
Moline, Illinois 61265
(309) 765-8000
www.JohnDeere.com
Deere & Company
Annual Report 2011
DEERE & COMPANY ANNUAL REPORT 2011
“I will never put my name
on a product that does not have in it
the best that is in me.”
— John Deere
Medallion created to celebrate
the company’s centennial in 1937.
COMMITTED TO THOSE LINKED TO THE LAND
The 175th anniversary of the founding of John Deere is a time to connect the pride of
the past with the promise of the future. Our heritage is rich. Our achievements are many.
Our future is bright. Guided by an ambitious plan for global growth, we aim to seize the
great opportunities that lie ahead, based on the world’s growing need for food, shelter and
infrastructure. John Deere’s goal is to capitalize on these positive trends in order to deliver
increasing value to our customers, investors and other constituents in the years ahead.
BOARD OF DIRECTORS
From left: David B. Speer, Aulana L. Peters, Thomas H. Patrick, Richard B. Myers, Joachim Milberg, Samuel R. Allen, Clayton M. Jones,
Dipak C. Jain, Charles O. Holliday, Jr., Vance D. Coffman and Crandall C. Bowles; shown at the John Deere Pavilion, Moline, Illinois,
with a sculpture of a John Deere combine made of canned and packaged foods that were later donated to area food pantries.
The Deere senior management team shown with replica of founder John Deere’s first 1837 plow and company’s new S690 Combine,
one of the world’s most advanced harvesters. From left, Dave Everitt, Mike Mack, Jim Jenkins, Sam Allen, Jean Gilles, Jim Field, Mark von Pentz, and Jim Israel.
Net Sales and Revenues (MM)
$23,112
2009
$26,005
2010
$32,013
2011
Operating Profit (MM)
$1,607
2009
$3,408
2010
Net Income *(MM)
$4,564
2011
$873
2009
$1,865
2010
$2,800
2011
*Net income attributable to Deere & Company
SAMUEL R. ALLEN (2)
Chairman and Chief Executive Officer
Deere & Company
DIPAK C. JAIN (9)
Dean, INSEAD
business education
CRANDALL C. BOWLES (15)
Chairman, Springs Industries, Inc.
Chairman, The Springs Company
home furnishings
CLAYTON M. JONES (4)
Chairman, President and Chief Executive Officer
Rockwell Collins, Inc.
aviation electronics and communications
VANCE D. COFFMAN (7)
Retired Chairman
Lockheed Martin Corporation
aerospace, defense and information technology
JOACHIM MILBERG (8)
Chairman, Supervisory Board
Bayerische Motoren Werke (BMW) AG
motor vehicles
CHARLES O. HOLLIDAY, JR. (4)
Chairman of the Board
Bank of America Corporation
banking, investing and asset management
RICHARD B. MYERS (5)
Retired Chairman, Joint Chiefs of Staff
Retired General, United States Air Force
principal military advisor to the President, the
Secretary of Defense, and the National Security Council
Figures in parentheses represent complete years of board
service through 12/31/11 and positions as of that date.
THOMAS H. PATRICK (11)
Chairman
New Vernon Capital, LLC
private equity fund
AULANA L. PETERS (9)
Retired Partner
Gibson, Dunn & Crutcher LLP
law firm
DAVID B. SPEER (3)
Chairman and Chief Executive Officer
Illinois Tool Works Inc.
engineered components,
industrial systems and consumables
(Not pictured: Elected 12/7/11)
SHERRY M. SMITH
Executive Vice President and Chief Financial Officer
SUPERVALU INC.
grocery
CHAIRMAN’S MESSAGE
2011 Marks Year of
Exceptional Achievement
for John Deere
John Deere prepares to observe its 175th anniversary after
concluding a year of exceptional achievement. Our company has
been noted for outstanding performance since its beginnings.
Yet in many respects, that performance reached new levels in 2011.
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maintained our conservative capital structure, and introduced
more products than ever before. We also strengthened our
commitment to responsible corporate citizenship and made
further strides in being a highly regarded employer.
As a result, the company remains well-positioned to capitalize on
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broad economic trends that hold great promise for the future.
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previous highs by a wide margin. Income was up 50 percent on a
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plans, which center on operating consistency and a disciplined
approach to asset and cost management. Rigorous execution
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These dollars helped us fuel major capital projects, pay out a
record amount in dividends to investors, and continue with share
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continued to be conservatively capitalized. At year-end, Deere
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Named “Tractor of the Year” by European
farm-magazine editors, the 7280R
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transport speeds that customers want.
Deere tractors have long been present
in Europe, including the Model “D”
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Model “D”
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Largest Division Sets Pace
Our performance was led by the Agriculture & Turf division
(A&T), which had yet another standout year. Sales increased
by $4.2 billion, one of the largest single-year gains ever.
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market an unprecedented number of new products and
broadened its customer base.
A&T results were aided by positive farm conditions and strong
sales of large equipment, particularly in the United States and
Canada. Sales in key markets such as Western and Central Europe,
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In other parts of our business, Construction & Forestry (C&F)
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than tripling on a sales increase of 45 percent. C&F introduced
advanced products, expanded into new geographies, and picked
up market share in key categories. Even with the year’s strong
growth – which has seen division sales more than double in
just two years – sales remained well below what traditionally has
been thought of as a normal level.
Further contributing to our results was John Deere Financial,
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customers. Financial Services’ earnings jumped 26 percent, largely
as a result of nearly $3 billion of portfolio growth. Credit quality
remained quite strong, with the provision for loss declining to a
mere $4 for each $10,000 of average portfolio value.
Powerful Tailwinds Shape Plans
Powerful trends sweeping the world are lending support to our
current performance and future prospects. Global population
continues to grow, surpassing 7 billion during the year. Of equal
importance, rising prosperity, particularly in developing economies
such as Brazil, Russia, India and China, is leading to a greater need
for food and energy. As a result, worldwide stocks of key farm
commodities have remained near historic lows in relation
to use. Grain prices and farm incomes have risen sharply
in response.
Listening to earthmoving contractors and road builders
helped the company design the Deere 850K Dozer.
Its 205-hp, IT4 engine and dual-path hydrostatic
transmission match power and speed to load.
Innovative cooling makes the 850K highly productive
on big job sites. Customer input drove design even for
Deere’s earlier machines like the 40C introduced in 1953.
40C Crawler
4
Rice binder
Deere harvesting machines like the 1920s-era rice
binder have been a part of rice harvesting for
generations. The new R40 Small Track Combine,
built in Ningbo, China, is designed for paddy rice
harvesting and can be used for wheat and other small
grains. The combine has an advanced separating
and cleaning system and a hydrostatic drive.
Many experts believe agricultural output will need to double by
mid-century to satisfy demand and do so from essentially the
same amount of land and with even less water. Production gains
on this scale are not without precedent. However, as in the past,
they will require further advances in farming mechanization and
productivity to achieve.
At the same time, people are migrating to cities from rural areas
in great numbers. This furthers the need for roads, bridges, and
buildings – and for the equipment required to construct them.
These trends, which appear to have considerable resilience,
are positive for John Deere. In our view, they should support
demand for innovative farm, construction, forestry and turf-care
equipment and related solutions well into the future.
Expanding our Global Market Presence
Favorable tailwinds are one thing; pursuing aggressive plans to
capture them is another. To that point, John Deere is moving
ahead with a far-reaching operating strategy aimed at expanding
our global presence in a major way. The plan’s centerpiece –
a mid-cycle sales goal of $50 billion by 2018 – requires substantial
investments in additional capacity, distribution, credit and aftermarket support.
Over the last year, Deere announced plans to build seven factories
in markets critical to our growth. These investments build on
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marketing presence worldwide.
Of the new facilities, three are in China, for construction
equipment, engines and large farm machinery; two are in Brazil,
both for construction equipment; and one is located in India,
5
440A Skidder
The 843K Wheeled Feller Buncher is designed
for high production and reliability with heavyduty axles and robust hydraulic and electrical
systems. Optional JDLink system monitors
use and productivity, and alerts operators
to maintenance needs. John Deere
has long made machines for
forestry applications, such as the
440A Skidder launched in 1966.
for the manufacture of farm tractors. Only last month plans were
disclosed to construct a facility in Russia for seeding, tillage and
application equipment.
In addition, new or expanded parts centers were opened during
the year in Germany, Sweden, Canada and Russia. Finance
operations were launched in China and are being planned
in Russia.
At the same time, we continued a pattern of making substantial
investments in our U.S. manufacturing base. In 2011, major
upgrades moved forward for our facilities in Davenport,
Des Moines and Waterloo. The company added some 2,500
employees to its U.S. workforce as well.
Even as we expand our global footprint, we continue to stress
the vital importance of the U.S. and Canadian markets. Last year,
the region accounted for 60 percent of our revenues, about
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spending on capital programs.
The John Deere of the future will be more global in scale and
more international in nature. Yet we fully intend to achieve
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ways to serve those customers who remain a cornerstone of
our success.
Record Year for New Products
Expanding our product range and entering attractive portions of
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John Deere introduced a record number of products, most of
which feature improvements in power, comfort and performance.
Many include John Deere engine technology that dramatically
reduces emissions while meeting customer requirements for
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New products include premium combines that set standards for
capacity and productivity, as well as the most powerful line of
John Deere tractors ever made. Other products new to the market
are our largest-ever self-propelled sprayers, one of which has a
6
No. 8 Picker
The 7760 Cotton Picker is revolutionizing the
industry by reducing need for labor and other
equipment involved in the harvesting process.
This machine compresses cotton into
5,000-lb. modules covered with protective wrap.
Operators continue harvesting while carrying
modules to a pick-up point. Early cotton pickers like
the No. 8 in 1951 helped mechanize harvesting.
120-foot boom. New models of construction equipment include
advanced excavators, productive dozers, and loaders with hybridelectric drivetrains.
As a company known for innovation since the time of our
founder’s original steel plow, John Deere received a number of
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medals presented at Europe’s largest farm equipment show,
eight awards from a leading U.S. agricultural-engineering group
and a gold medal earned at an international competition in France.
The recognized technologies pertain to advanced steering,
tractor implement automation and crop harvesting logistics,
among other areas. In addition, the John Deere 7280R was
named tractor of the year by European farm-magazine editors.
Our values both unite and differentiate us. They have sustained
the loyalty of generations of customers and are a source of
inspiration for thousands of supremely talented employees,
dealers and suppliers. Further, our values have helped deliver
solid returns to investors over many years.
As John Deere expands throughout the world, we continue to
dedicate ourselves to the company’s core values – integrity,
quality, commitment and innovation – and we recognize their
prominent role in sustaining our success.
Building on Proud Record of Citizenship
Being a responsible corporate citizen and a progressive employer
are essential to being a great company. They have characterized
John Deere throughout its history.
Tethered to Timeless Principles
Regardless of the strength of our markets or the scale of our
investments, John Deere’s future rests on a foundation of timeless
principles. They have shaped our character as a company for
175 years and have made John Deere a special kind of enterprise.
7
Model “LA”
New 1026R Sub-compact Utility Tractor answers customers’
need for versatility and ease of use. It can be operated
with three implements attached, reducing changeover time.
No tools are needed to attach or remove compatible
implements. Versatile small tractors, like the “LA” in 1941,
were popular utility tractors on small farms.
During the year, the John Deere Foundation provided continued
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practices in developing countries. Along these lines, Opportunity
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farmers in Africa, remained a major recipient of foundation support.
As well, John Deere employees are helping enrich their
communities through extensive volunteer efforts. In launching
the company’s formal volunteerism initiative in 2011, a group
of 20 John Deere leaders including me spent several days in India
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a foundation grant to help these farmers grow more food and
increase their incomes.
In addition, the John Deere Foundation continued its support
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agriculture, science, technology, engineering and business.
Through a partnership with a leading German university, the
foundation helped sponsor an agricultural-development training
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concern and respect shown for our employees. As an example,
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this exceptional record got even better in 2011. The rate of
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line with historic lows. More than half of our locations did not
have a single lost-time incident during the year.
In other milestones, the company’s leadership development
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8
2011 HIGHLIGHTS
by Fortune magazine. Deere also was named one of the best
companies to work for in Brazil by a top survey. These are
important acknowledgements of our ability to identify, nurture
and develop top talent.
175 Years of Building for the Future
John Deere is poised for growth and future success. Building
on our strong performance in 2011, the company remains
well-positioned to capitalize on the broad economic trends
that have large-scale potential.
Thanks to the tireless efforts of John Deere employees, dealers
and suppliers throughout the world, our plans for helping
meet the world’s growing need for advanced agricultural and
construction equipment are on track and moving ahead at an
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about the company’s prospects and our ability to deliver
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For 175 years, John Deere has been setting standards of
achievement. Throughout this time, we have been building for
the future, a future which in our view has never held a greater
measure of promise or opportunity for those with a stake in
our success.
DEERE ENTERPRISE
SVA (MM)
– Aided by healthy global
farm conditions and skillful
execution, earnings increase
50% to $2.8 billion. Sales
and revenues rise by 23%.
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and continued asset discipline
propel SVA (Shareholder
Value Added) to $2.5 billion,
well above previous record
set in 2010.
$1,714
$2,527
2010
2011
-$84
2009
– Providing basis for further
growth, capital expenditures reach nearly $1.1 billion;
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in engine-emissions technology and new products.
– With goal of providing value directly to shareholders, company
boosts quarterly dividend rate by 17% and repurchases
20.8 million shares.
– Deere listed among 50 most-admired companies by Fortune
magazine and ranked as one of 100 best global brands by a
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EQUIPMENT OPERATIONS
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That’s why we say with pride and conviction there has never
been a better time to be associated with John Deere! To all
who share our passion for serving those linked to the land
and our optimism for meeting the challenges that lie ahead,
we express our thanks for your encouragement and support.
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and focus on managing assets.
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increases to $3.839 billion on
25% sales increase.
On behalf of the John Deere team,
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conditions and strong
2009
2010
2011
execution, operating margins
rise to 13%; OROA (Operating Return on Operating Assets)
nears 30%, with inventories valued at standard cost.
December 19, 2011
$64
$1,650
$2,294
– Showing emphasis on global growth, sales outside the U.S.
and Canada jump 38% – and exceed 40% of the company total.
Samuel R. Allen
– Increasing its presence in high-growth regions, company
begins work on engine plant in China to supply John Deere
agricultural and construction equipment factories in Asia.
– John Deere Technology Center – India installs virtual reality
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and lower costs.
– John Deere Power Systems engines receive U.S. EPA Interim
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9
AGRICULTURE & TURF
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FINANCIAL SERVICES
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$441
2009
$1,813
2010
$2,245
2011
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CONSTRUCTION & FORESTRY
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American sales result in
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$233
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2011
2009
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– Net income attributable to
Deere & Company reaches
$471 million, in spite of
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2010
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2011
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S&P 500 Construction & Farm Machinery
S&P 500
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The graph compares the cumulative total returns of Deere & Company, the S&P 500 Construction &
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10
FINANCIAL REVIEW
SVA: FOCUSING ON GROWTH AND SUSTAINABLE PERFORMANCE
TABLE OF CONTENTS
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and pretax cost of capital – is a metric used by John Deere to evaluate business results
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Management’s Discussion
and Analysis ........................... 12
In arriving at SVA, each equipment segment is assessed a pretax cost of assets – generally
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Financial-services businesses are assessed a cost of average equity – approximately
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$MM unless indicated
2009
2011
2010
2011
5372
[ x x 2009
2010
2011
Net Sales
2634
3705
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Average Assets
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252$#/,)2
$VVHW7XUQV6WG&RVW
Operating Margin %
x -3 [2
252$#6WDQGDUG&RVW
$MM
2009
2010
x 7
2011
- -259
$YHUDJH$VVHWV#6WG&RVW
2SHUDWLQJ3URƟW/RVV
Cost of Assets
69$
20756 23573 29466
$YHUDJH$VVHWV#6WG&RVW
2SHUDWLQJ3URƟW
Cost of Assets
69$
-545
Deere Equipment Operations, to create and grow SVA,
are targeting an operating return on average operating
assets (OROA) of 20% at mid-cycle sales volumes –
DQGRWKHUDPELWLRXVUHWXUQVDWRWKHUSRLQWVLQWKHF\FOH
(For purposes of this calculation, operating assets are
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YDOXHGDWVWDQGDUGFRVW
AGRICULTURE & TURF
2009
Notes to Consolidated
Financial Statements ............. 27
CONSTRUCTION & FORESTRY
2010
Net Sales
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Average Assets
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$VVHW7XUQV6WG&RVW
Operating Margin %
252$#6WDQGDUG&RVW
$MM
$MM unless indicated
Consolidated Financial
Statements ........................... 23
Selected Financial Data .......... 57
Additional information on these metrics and their relationship to amounts presented in accordance with U.S. GAAP
can be found at our website, www.JohnDeere.com. Note: Some totals may vary due to rounding.
DEERE EQUIPMENT OPERATIONS
Reports of Management
and Independent Registered
Public Accounting Firm........... 22
2010
2011
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Average Assets
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:LWK,QYHQWRULHV#/,)2
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$VVHW7XUQV6WG&RVW
Operating Margin %
252$#6WDQGDUG&RVW
$MM
$YHUDJH$VVHWV#6WG&RVW
2SHUDWLQJ3URƟW
Cost of Assets
69$
-007
x 7 x x 2009
2010
2011
-977
$MM unless indicated
2009
-294
-343
$MM unless indicated
2009
2010
2011
Net Income Attributable
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$YHUDJH(TXLW\
52(
$MM
2009
2010
2011
Š
Š
-492
FINANCIAL SERVICES
2SHUDWLQJ3URƟW
Change in Allowance for
'RXEWIXO5HFHLYDEOHV
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$YHUDJH(TXLW\
Average Allowance for
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69$$YHUDJH(TXLW\
69$,QFRPH
Cost of Equity
69$
The Financial Services SVA metric is calculated on a
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adjusted for changes in the allowance for doubtful
receivables, while the average allowance was excluded
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11
11
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR THE YEARS ENDED
OCTOBER 31, 2011, 2010 AND 2009
OVERVIEW
Organization
The company’s equipment operations generate revenues and
cash primarily from the sale of equipment to John Deere dealers
and distributors. The equipment operations manufacture and
distribute a full line of agricultural equipment; a variety of
commercial, consumer and landscapes equipment and products;
and a broad range of equipment for construction and forestry.
The company’s financial services primarily provide credit
services, which mainly finance sales and leases of equipment
by John Deere dealers and trade receivables purchased from
the equipment operations. In addition, financial services
offer crop risk mitigation products and extended equipment
warranties. The information in the following discussion is
presented in a format that includes information grouped as
consolidated, equipment operations and financial services.
The company’s operating segments consist of agriculture
and turf, construction and forestry, and financial services.
The previous credit segment and the “Other” segment were
combined into the financial services segment at the beginning
of the first quarter of 2011 (see Note 28). The “Other” segment
consisted of an insurance business related to extended warranty
policies for equipment that did not meet the materiality
threshold of reporting. The following discussions of operating
segment results and liquidity ratios have been revised to
conform to the current segments.
Trends and Economic Conditions
Industry farm machinery sales in the U.S. and Canada for 2012
are forecast to be up approximately 5 to 10 percent, compared
to 2011. Industry sales in the EU 27 nations of Western and
Central Europe are forecast to be about the same in 2012, while
sales in the Commonwealth of Independent States are expected
to be moderately higher. Sales in Asia are forecast to increase
strongly again in 2012. South American industry sales are
projected to be approximately the same as 2011. Industry sales
of turf and utility equipment in the U.S. and Canada are
expected to increase slightly. The company’s agriculture and turf
equipment sales increased 21 percent in 2011 and are forecast to
increase by about 15 percent for 2012. Construction equipment
markets are forecast to slightly improve, while global forestry
markets are expected to be about the same in 2012. The company’s construction and forestry sales increased 45 percent in
2011 and are forecast to increase by about 16 percent in 2012.
Net income of the company’s financial services operations
attributable to Deere & Company in 2012 is forecast to be
approximately $450 million.
Items of concern include the uncertainty of the global
economic recovery, the impact of sovereign and state debt,
capital market disruptions, the availability of credit for the
company’s customers and suppliers, the effectiveness of
governmental actions in respect to monetary policies, general
economic conditions and financial regulatory reform.
Significant volatility in the price of many commodities could
also impact the company’s results, while the availability of
12
certain components that could impact the company’s ability to
meet production schedules continues to be monitored.
Designing and producing products with engines that continue
to meet high performance standards and increasingly stringent
emissions regulations is one of the company’s major priorities.
Supported by record 2011 performance, the company
remains well positioned to implement its growth plans and
capitalize on positive long-term economic trends. The company’s
strong levels of cash flow are funding growth throughout the
world and are being shared with investors in the form of
dividends and share repurchases.
2011 COMPARED WITH 2010
CONSOLIDATED RESULTS
Worldwide net income attributable to Deere & Company in
2011 was $2,800 million, or $6.63 per share diluted ($6.71
basic), compared with $1,865 million, or $4.35 per share
diluted ($4.40 basic), in 2010. Net sales and revenues increased
23 percent to $32,013 million in 2011, compared with
$26,005 million in 2010. Net sales of the equipment operations
increased 25 percent in 2011 to $29,466 million from $23,573
million last year. The sales increase, which was primarily due to
higher shipment volumes, also included a favorable effect for
foreign currency translation of 3 percent and price realization
of 3 percent. Net sales in the U.S. and Canada increased
17 percent in 2011. Net sales outside the U.S. and Canada
increased by 38 percent in 2011, which included a favorable
effect of 7 percent for foreign currency translation.
Worldwide equipment operations had an operating profit
of $3,839 million in 2011, compared with $2,909 million in
2010. The higher operating profit was primarily due to higher
shipment volumes and improved price realization, partially
offset by increased raw material costs, higher manufacturing
overhead costs related to new products, higher selling,
administrative and general expenses and increased research and
development expenses.
The equipment operations’ net income was $2,329 million
in 2011, compared with $1,492 million in 2010. The same
operating factors mentioned above and a lower effective tax rate
in 2011 affected these results.
Net income of the financial services operations attributable to Deere & Company in 2011 increased to $471 million,
compared with $373 million in 2010. The increase was
primarily a result of growth in the credit portfolio and a lower
provision for credit losses. Additional information is presented
in the following discussion of the “Worldwide Financial
Services Operations.”
The cost of sales to net sales ratio for 2011 was 74.4 percent,
compared with 73.8 percent last year. The increase was primarily
due to increased raw material costs and higher manufacturing
overhead costs related to new products, partially offset by
improved price realization.
Finance and interest income increased this year due to a
larger average credit portfolio, partially offset by lower financing
rates. Other income increased primarily as a result of higher
insurance premiums and fees earned on crop insurance, largely
offset by lower service revenues due to the sale of the wind
energy business (see Note 4). Research and development
expenses increased primarily as a result of increased spending in
support of new products and Interim and Final Tier 4 emission
requirements. Selling, administrative and general expenses
increased primarily due to growth and higher sales commissions.
Interest expense decreased due to lower average borrowing rates,
partially offset by higher average borrowings. Other operating
expenses decreased primarily due to lower depreciation
expenses this year due to the sale of the wind energy business
and the write-down of the related assets held for sale at the end
of last year, partially offset by higher crop insurance claims and
expenses this year. The effective tax rate for the provision for
income taxes was lower this year primarily due to the effect
of the tax expense related to the enactment of health care
legislation in 2010 (see Note 8).
The company has several defined benefit pension plans
and defined benefit health care and life insurance plans.
The company’s postretirement benefit costs for these plans in
2011 were $603 million, compared with $658 million in 2010.
The long-term expected return on plan assets, which is
reflected in these costs, was an expected gain of 8.0 percent
in 2011 and 8.2 percent in 2010, or $906 million in 2011
and $883 million in 2010. The actual return was a gain of
$695 million in 2011 and $1,273 million in 2010. In 2012,
the expected return will be approximately 8.0 percent.
The company expects postretirement benefit costs in 2012 to
be approximately the same as 2011. The company makes any
required contributions to the plan assets under applicable
regulations and voluntary contributions from time to time based
on the company’s liquidity and ability to make tax-deductible
contributions. Total company contributions to the plans were
$122 million in 2011 and $836 million in 2010, which include
direct benefit payments for unfunded plans. These contributions
also included voluntary contributions to plan assets of $650
million in 2010. Total company contributions in 2012 are
expected to be approximately $466 million, which include
direct benefit payments. The company has no required
significant contributions to pension plan assets in 2012 under
applicable funding regulations. See the following discussion of
“Critical Accounting Policies” for more information about
postretirement benefit obligations.
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
The following discussion relates to operating results by
reportable segment and geographic area. Operating profit is
income before certain external interest expense, certain foreign
exchange gains or losses, income taxes and corporate expenses.
However, operating profit of the financial services segment
includes the effect of interest expense and foreign currency
exchange gains or losses.
Worldwide Agriculture and Turf Operations
The agriculture and turf segment had an operating profit of
$3,447 million in 2011, compared with $2,790 million in 2010.
Net sales increased 21 percent this year primarily due to higher
shipment volumes. Sales also increased due to improved price
realization and foreign currency translation. The increase in
operating profit was largely due to increased shipment volumes
and improved price realization, partially offset by increased raw
material costs, higher manufacturing overhead costs related to
new products, higher selling, administrative and general
expenses and increased research and development expenses.
Worldwide Construction and Forestry Operations
The construction and forestry segment had an operating profit
of $392 million in 2011, compared with $119 million in 2010.
Net sales increased 45 percent for the year primarily due to
higher shipment volumes. Sales also increased due to improved
price realization. The operating profit improvement in 2011
was primarily due to higher shipment and production volumes
and improved price realization, partially offset by increased raw
material costs, higher selling, administrative and general
expenses and increased research and development expenses.
Worldwide Financial Services Operations
The operating profit of the financial services segment was
$725 million in 2011, compared with $499 million in 2010.
The increase in operating profit was primarily due to growth
in the credit portfolio and a lower provision for credit losses,
partially offset by narrower financing spreads. Last year’s results
were also affected by the write-down of wind energy assets that
were held for sale (see Note 4). Total revenues of the financial
services operations, including intercompany revenues, increased
3 percent in 2011, primarily reflecting the larger portfolio. The
average balance of receivables and leases financed was 13
percent higher in 2011, compared with 2010. Interest expense
decreased 7 percent in 2011 as a result of lower average
borrowing rates, partially offset by higher average borrowings.
The financial services operations’ ratio of earnings to fixed
charges was 2.22 to 1 in 2011, compared with 1.77 to 1 in 2010.
Equipment Operations in U.S. and Canada
The equipment operations in the U.S. and Canada had an
operating profit of $2,898 million in 2011, compared with
$2,302 million in 2010. The increase was due to higher
shipment volumes and improved price realization, partially
offset by increased raw material costs, higher manufacturing
overhead costs related to new products, increased selling,
administrative and general expenses and higher research and
development expenses. Net sales increased 17 percent primarily
due to higher shipment volumes and improved price realization.
The physical volume of sales increased 12 percent, compared
with 2010.
Equipment Operations outside U.S. and Canada
The equipment operations outside the U.S. and Canada had
an operating profit of $941 million in 2011, compared with
$607 million in 2010. The increase was primarily due to the
effects of higher shipment volumes and improved price
realization, partially offset by higher raw material costs, higher
manufacturing overhead costs related to new products,
increased selling, administrative and general expenses and higher
research and development costs. Net sales were 38 percent
higher primarily reflecting increased volumes and the effect of
foreign currency translation. The physical volume of sales
increased 30 percent, compared with 2010.
13
MARKET CONDITIONS AND OUTLOOK
In spite of an unsettled global economy, demand for the
company’s products is expected to experience substantial growth
in fiscal year 2012 and the company is forecasting further
increases in sales and earnings as a result. Company equipment
sales are projected to increase about 15 percent for the year
and 16 to 18 percent for the first quarter, compared with the
same periods of 2011. Included is a favorable currency translation impact of about 3 percent for the first quarter and about
1 percent for the year. Net income attributable to
Deere & Company for the year is anticipated to be approximately $3.2 billion.
Agriculture and Turf. Worldwide sales of the company’s
agriculture and turf segment are forecast to increase by about
15 percent for fiscal year 2012, with a favorable currency
translation impact of about 1 percent. Farmers in the world’s
major markets are continuing to experience favorable
incomes due to strong demand for agricultural commodities.
The company’s sales are expected to benefit as well from
advanced new products being launched throughout the world
and major expansion projects such as those in emerging markets.
Industry farm machinery sales in the U.S. and Canada
are forecast to increase 5 to 10 percent in 2012, following an
increase in 2011. Overall conditions remain positive and
demand continues to be strong, especially for high horsepower
equipment.
Industry sales in the EU 27 nations of Western and
Central Europe are forecast to be approximately the same for
2012 as a result of general economic concerns in the region.
Sales in the Commonwealth of Independent States are expected
to be moderately higher, after rising substantially in 2011.
Sales in Asia are forecast to increase strongly again in 2012.
In South America, industry sales for the year are projected to
be about the same as the strong levels of 2011.
Industry sales of turf and utility equipment in the U.S.
and Canada are expected to increase slightly in 2012.
Construction and Forestry. Worldwide sales of the company’s
construction and forestry equipment are forecast to grow by
about 16 percent for fiscal year 2012, with a favorable currency
translation impact of about 1 percent. The increase reflects
slightly improved market conditions and improved activity
outside of the U.S., including strength in Canada. Construction
equipment sales to independent rental companies are expected
to see further gains. The company’s sales also are expected to
be supported by a range of advanced new products and by
geographic expansion. After considerable growth in 2011,
world forestry markets are projected to be about the same in
2012 due to weaker economic conditions in Europe.
Financial Services. Fiscal year 2012 net income attributable
to Deere & Company for the financial services operations is
expected to be approximately $450 million. The forecast
decline from 2011 is primarily due to an increase in the
provision for credit losses, which is anticipated to return to a
more typical level, as well as higher selling, administrative and
general expenses in support of enterprise growth initiatives.
Partially offsetting these items is expected growth in the credit
portfolio.
14
SAFE HARBOR STATEMENT
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995: Statements under “Overview,” “Market Conditions
and Outlook” and other forward-looking statements herein that
relate to future events, expectations, trends and operating
periods involve certain factors that are subject to change, and
important risks and uncertainties that could cause actual results
to differ materially. Some of these risks and uncertainties could
affect particular lines of business, while others could affect all of
the company’s businesses.
The company’s agricultural equipment business is subject
to a number of uncertainties including the many interrelated
factors that affect farmers’ confidence. These factors include
worldwide economic conditions, demand for agricultural
products, world grain stocks, weather conditions (including its
effects on timely planting and harvesting), soil conditions,
harvest yields, prices for commodities and livestock, crop and
livestock production expenses, availability of transport for crops,
the growth of non-food uses for some crops (including ethanol
and biodiesel production), real estate values, available acreage
for farming, the land ownership policies of various governments, changes in government farm programs and policies
(including those in Argentina, Brazil, China, Russia and the
U.S.), international reaction to such programs, global trade
agreements, animal diseases and their effects on poultry, beef
and pork consumption and prices, crop pests and diseases, and
the level of farm product exports (including concerns about
genetically modified organisms).
Factors affecting the outlook for the company’s turf and
utility equipment include general economic conditions,
consumer confidence, weather conditions, customer profitability, consumer borrowing patterns, consumer purchasing
preferences, housing starts, infrastructure investment, spending
by municipalities and golf courses, and consumable input costs.
General economic conditions, consumer spending
patterns, real estate and housing prices, the number of housing
starts and interest rates are especially important to sales of the
company’s construction and forestry equipment. The levels of
public and non-residential construction also impact the results
of the company’s construction and forestry segment. Prices for
pulp, paper, lumber and structural panels are important to sales
of forestry equipment.
All of the company’s businesses and its reported results are
affected by general economic conditions in the global markets
in which the company operates, especially material changes in
economic activity in these markets; customer confidence in
general economic conditions; foreign currency exchange rates
and their volatility, especially fluctuations in the value of the
U.S. dollar; interest rates; and inflation and deflation rates.
General economic conditions can affect demand for the
company’s equipment as well.
Customer and company operations and results could be
affected by changes in weather patterns (including the effects of
dry weather in parts of the U.S. and wet weather in parts of
Eastern and Western Europe); the political and social stability of
the global markets in which the company operates; the effects
of, or response to, terrorism and security threats; wars and other
conflicts and the threat thereof; and the spread of major
epidemics.
Significant changes in market liquidity conditions and any
failure to comply with financial covenants in credit agreements
could impact access to funding and funding costs, which could
reduce the company’s earnings and cash flows. Financial market
conditions could also negatively impact customer access to
capital for purchases of the company’s products and customer
confidence and purchase decisions; borrowing and repayment
practices; and the number and size of customer loan delinquencies and defaults. The sovereign debt crisis, in Europe or
elsewhere, could negatively impact currencies, global financial
markets, social and political stability, funding sources and costs,
customers, and company operations and results. State debt crises
also could negatively impact customers, suppliers, demand for
equipment, and company operations and results. The company’s
investment management activities could be impaired by changes
in the equity and bond markets, which would negatively affect
earnings.
Additional factors that could materially affect the company’s
operations, access to capital, expenses and results include changes
in and the impact of governmental trade, banking, monetary
and fiscal policies, including financial regulatory reform and its
effects on the consumer finance industry, derivatives, funding
costs and other areas, and governmental programs in particular
jurisdictions or for the benefit of certain industries or sectors
(including protectionist policies and trade and licensing
restrictions that could disrupt international commerce); actions
by the U.S. Federal Reserve Board and other central banks;
actions by the U.S. Securities and Exchange Commission (SEC),
the U.S. Commodity Futures Trading Commission and other
financial regulators; actions by environmental, health and safety
regulatory agencies, including those related to engine emissions
(in particular Interim Tier 4 and Final Tier 4 emission requirements), carbon emissions, noise and the risk of climate change;
changes in labor regulations; changes to accounting standards;
changes in tax rates, estimates, and regulations; compliance with
U.S. and foreign laws when expanding to new markets; and
actions by other regulatory bodies including changes in laws
and regulations affecting the sectors in which the company
operates. Customer and company operations and results also
could be affected by changes to GPS radio frequency bands or
their permitted uses.
Other factors that could materially affect results include
production, design and technological innovations and difficulties, including capacity and supply constraints and prices;
the availability and prices of strategically sourced materials,
components and whole goods; delays or disruptions in the
company’s supply chain due to weather, natural disasters or
financial hardship or the loss of liquidity by suppliers; start-up
of new plants and new products; the success of new product
initiatives and customer acceptance of new products; changes in
customer product preferences and sales mix whether as a result
of changes in equipment design to meet government regulations
or for other reasons; oil and energy prices and supplies; the
availability and cost of freight; actions of competitors in the
various industries in which the company competes, particularly
price discounting; dealer practices especially as to levels of new
and used field inventories; labor relations; acquisitions and
divestitures of businesses, the integration of new businesses;
the implementation of organizational changes; difficulties
related to the conversion and implementation of enterprise
resource planning systems that disrupt business, negatively
impact supply or distribution relationships or create higher than
expected costs; changes in company declared dividends and
common stock issuances and repurchases.
Company results are also affected by changes in the level
and funding of employee retirement benefits, changes in market
values of investment assets and the level of interest rates, which
impact retirement benefit costs, and significant changes in
health care costs including those which may result from
governmental action.
The liquidity and ongoing profitability of John Deere
Capital Corporation (Capital Corporation) and other credit
subsidiaries depend largely on timely access to capital to meet
future cash flow requirements and fund operations and the costs
associated with engaging in diversified funding activities and to
fund purchases of the company’s products. If market uncertainty
increases and general economic conditions worsen, funding
could be unavailable or insufficient. Additionally, customer
confidence levels may result in declines in credit applications
and increases in delinquencies and default rates, which could
materially impact write-offs and provisions for credit losses.
The company’s outlook is based upon assumptions
relating to the factors described above, which are sometimes
based upon estimates and data prepared by government agencies.
Such estimates and data are often revised. The company, except
as required by law, undertakes no obligation to update or revise
its outlook, whether as a result of new developments or
otherwise. Further information concerning the company and its
businesses, including factors that potentially could materially
affect the company’s financial results, is included in other filings
with the SEC.
2010 COMPARED WITH 2009
CONSOLIDATED RESULTS
Worldwide net income attributable to Deere & Company in
2010 was $1,865 million, or $4.35 per share diluted ($4.40
basic), compared with $873 million, or $2.06 per share diluted
($2.07 basic), in 2009. Included in net income for 2009 were
charges of $381 million pretax ($332 million after-tax), or $.78
per share diluted and basic, related to impairment of goodwill
and voluntary employee separation expenses (see Note 5).
Net sales and revenues increased 13 percent to $26,005 million
in 2010, compared with $23,112 million in 2009. Net sales of
the equipment operations increased 14 percent in 2010 to
$23,573 million from $20,756 million in 2009. The sales
increase was primarily due to higher shipment volumes.
The increase also included a favorable effect for foreign currency
translation of 3 percent and a price increase of 2 percent.
Net sales in the U.S. and Canada increased 14 percent in 2010.
15
Net sales outside the U.S. and Canada increased by 14 percent
in 2010, which included a favorable effect of 5 percent for
foreign currency translation.
Worldwide equipment operations had an operating
profit of $2,909 million in 2010, compared with $1,365 million
in 2009. The higher operating profit was primarily due to
higher shipment and production volumes, improved price
realization, the favorable effects of foreign currency exchange
and lower raw material costs, partially offset by increased
postretirement costs and higher incentive compensation expenses.
The results in 2009 were also affected by a goodwill impairment
charge and voluntary employee separation expenses.
The equipment operations’ net income was $1,492 million
in 2010, compared with $677 million in 2009. The same
operating factors mentioned above affected these results.
Net income of the company’s financial services operations
attributable to Deere & Company in 2010 increased to
$373 million, compared with $203 million in 2009. The increase
was primarily a result of improved financing spreads and a lower
provision for credit losses. Additional information is presented in
the following discussion of the “Worldwide Financial Services
Operations.”
The cost of sales to net sales ratio for 2010 was 73.8 percent,
compared with 78.3 percent in 2009. The decrease was
primarily due to higher shipment and production volumes,
improved price realization, favorable effects of foreign currency
exchange and lower raw material costs. A larger goodwill
impairment charge and voluntary employee separation expenses
affected the ratio in 2009.
Finance and interest income decreased in 2010 due to
lower financing rates, partially offset by a larger average portfolio.
Other income increased primarily as a result of an increase in
wind energy income, higher commissions from crop insurance
and higher service revenues. Research and development
expenses increased primarily as a result of increased spending in
support of new products including designing and producing
products with engines to meet more stringent emissions
regulations. Selling, administrative and general expenses
increased primarily due to increased incentive compensation
expenses, higher postretirement benefit costs and the effect of
foreign currency translation. Interest expense decreased due to
lower average borrowing rates and lower average borrowings.
Other operating expenses increased primarily due to the
write-down of wind energy assets classified as held for sale in
2010 (see Note 4). The equity in income of unconsolidated
affiliates increased as a result of higher income from construction equipment manufacturing affiliates due to increased levels
of construction activity.
The company has several defined benefit pension plans
and defined benefit health care and life insurance plans.
The company’s postretirement benefit costs for these plans in
2010 were $658 million, compared with $312 million in 2009,
primarily due to a decrease in discount rates. The long-term
expected return on plan assets, which is reflected in these costs,
was an expected gain of 8.2 percent in 2010 and 2009, or
$883 million in 2010 and $857 million in 2009. The actual
16
return was a gain of $1,273 million in 2010 and $1,142 million
in 2009. Total company contributions to the plans were $836
million in 2010 and $358 million in 2009, which include direct
benefit payments for unfunded plans. These contributions also
included voluntary contributions to total plan assets of approximately $650 million in 2010 and $150 million in 2009.
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
Worldwide Agriculture and Turf Operations
The agriculture and turf segment had an operating profit of
$2,790 million in 2010, compared with $1,448 million in 2009.
Net sales increased 10 percent in 2010 primarily due to higher
production and shipment volumes. Sales also increased due to
foreign currency translation and improved price realization.
The increase in operating profit was due to increased shipment
and production volumes, improved price realization, the
favorable effects of foreign currency exchange and lower raw
material costs, partially offset by higher postretirement benefit
costs and increased incentive compensation expenses.
The results in 2009 were affected by a goodwill impairment
charge and voluntary employee separation expenses.
Worldwide Construction and Forestry Operations
The construction and forestry segment had an operating profit
of $119 million in 2010, compared with a loss of $83 million in
2009. Net sales increased 41 percent in 2010 due to higher
shipment and production volumes. The operating profit
improvement in 2010 was primarily due to higher shipment and
production volumes, partially offset by higher postretirement
benefit costs and increased incentive compensation expenses.
Worldwide Financial Services Operations
The operating profit of the financial services segment was
$499 million in 2010, compared with $242 million in 2009.
The increase in operating profit was primarily due to improved
financing spreads and a lower provision for credit losses.
Total revenues of the financial services operations, including
intercompany revenues, increased 1 percent in 2010, primarily
reflecting the larger portfolio. The average balance of receivables and leases financed was 5 percent higher in 2010,
compared with 2009. Interest expense decreased 28 percent in
2010 as a result of lower borrowing rates and lower average
borrowings. The financial services operations’ ratio of earnings
to fixed charges was 1.77 to 1 in 2010, compared with 1.26 to
1 in 2009.
Equipment Operations in U.S. and Canada
The equipment operations in the U.S. and Canada had an
operating profit of $2,302 million in 2010, compared with
$1,129 million in 2009. The increase was due to higher
shipment and production volumes, improved price realization
and lower raw material costs, partially offset by increased
postretirement benefit costs and higher incentive compensation
expenses. The operating profit in 2009 was affected by a
goodwill impairment charge and voluntary employee separation
expenses. Net sales increased 14 percent primarily due to higher
volumes and improved price realization. The physical volume
increased 10 percent, compared with 2009.
Equipment Operations outside U.S. and Canada
The equipment operations outside the U.S. and Canada had
an operating profit of $607 million in 2010, compared with
$236 million in 2009. The increase was primarily due to the
effects of higher shipment and production volumes, the
favorable effects of foreign currency exchange rates, improved
price realization and decreases in raw material costs, partially
offset by higher incentive compensation expenses. Net sales
were 14 percent higher primarily reflecting increased volumes
and the effect of foreign currency translation. The physical
volume increased 8 percent, compared with 2009.
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been
organized to review separately, where appropriate, the company’s
consolidated totals, equipment operations and financial services
operations.
CONSOLIDATED
Positive cash flows from consolidated operating activities in
2011 were $2,326 million. This resulted primarily from net
income adjusted for non-cash provisions, an increase in
accounts payable and accrued expenses and an increase in the
net retirement benefits liability, which were partially offset by
an increase in inventories and trade receivables. Cash outflows
from investing activities were $2,621 million in 2011, primarily
due to the cost of receivables (excluding receivables related to
sales) and equipment on operating leases exceeding the collections of receivables and the proceeds from sales of equipment
on operating leases by $1,746 million, purchases of property
and equipment of $1,057 million and purchases exceeding
maturities and sales of marketable securities by $555 million,
partially offset by proceeds from the sales of businesses of
$911 million (see Note 4). Cash inflows from financing activities
were $140 million in 2011 primarily due to an increase in
borrowings of $2,208 million and proceeds from issuance of
common stock of $170 million (resulting from the exercise of
stock options), partially offset by repurchases of common stock
of $1,667 million and dividends paid of $593 million. Cash and
cash equivalents decreased $143 million during 2011.
Over the last three years, operating activities have
provided an aggregate of $6,593 million in cash. In addition,
increases in borrowings were $2,977 million, proceeds from
sales of businesses were $946 million, proceeds from issuance
of common stock were $316 million and proceeds from
maturities and sales of marketable securities exceeded purchases
by $216 million. The aggregate amount of these cash flows was
used mainly to acquire receivables (excluding receivables related
to sales) and equipment on operating leases that exceeded
collections and the proceeds from sales of equipment on
operating leases by $3,029 million, purchase property and
equipment of $2,725 million, repurchase common stock of
$2,029 million, pay dividends to stockholders of $1,550 million
and acquire businesses for $156 million. Cash and cash equivalents increased $1,436 million over the three-year period.
Given the continued uncertainty in the global economy,
there has been a reduction in liquidity in some global markets
that continues to affect the funding activities of the company.
However, the company has access to most global markets at a
reasonable cost and expects to have sufficient sources of global
funding and liquidity to meet its funding needs. Sources of
liquidity for the company include cash and cash equivalents,
marketable securities, funds from operations, the issuance of
commercial paper and term debt, the securitization of retail
notes (both public and private markets) and committed and
uncommitted bank lines of credit. The company’s commercial
paper outstanding at October 31, 2011 and 2010 was $1,279
million and $2,028 million, respectively, while the total cash
and cash equivalents and marketable securities position was
$4,435 million and $4,019 million, respectively. The amount
of the total cash and cash equivalents and marketable securities
held by foreign subsidiaries, in which earnings are considered
indefinitely reinvested, was $720 million and $611 million at
October 31, 2011 and 2010, respectively.
Lines of Credit. The company also has access to bank
lines of credit with various banks throughout the world.
Worldwide lines of credit totaled $5,080 million at October 31,
2011, $3,721 million of which were unused. For the purpose of
computing unused credit lines, commercial paper and short-term
bank borrowings, excluding secured borrowings and the current
portion of long-term borrowings, were primarily considered to
constitute utilization. Included in the total credit lines at
October 31, 2011 was a long-term credit facility agreement of
$2,750 million, expiring in April 2015, and a long-term credit
facility agreement of $1,500 million, expiring in April 2013.
These credit agreements require Capital Corporation to
maintain its consolidated ratio of earnings to fixed charges at
not less than 1.05 to 1 for each fiscal quarter and the ratio of
senior debt, excluding securitization indebtedness, to capital
base (total subordinated debt and stockholder’s equity excluding
accumulated other comprehensive income (loss)) at not more
than 11 to 1 at the end of any fiscal quarter. The credit agreements also require the equipment operations to maintain a ratio
of total debt to total capital (total debt and stockholders’ equity
excluding accumulated other comprehensive income (loss)) of
65 percent or less at the end of each fiscal quarter. Under this
provision, the company’s excess equity capacity and retained
earnings balance free of restriction at October 31, 2011 was
$8,503 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of
$15,791 million at October 31, 2011. All of these requirements
of the credit agreements have been met during the periods
included in the consolidated financial statements.
Debt Ratings. To access public debt capital markets, the
company relies on credit rating agencies to assign short-term
and long-term credit ratings to the company’s securities as an
indicator of credit quality for fixed income investors. A security
rating is not a recommendation by the rating agency to buy,
sell or hold company securities. A credit rating agency may
change or withdraw company ratings based on its assessment
of the company’s current and future ability to meet interest and
principal repayment obligations. Each agency’s rating should
be evaluated independently of any other rating. Lower credit
ratings generally result in higher borrowing costs, including
costs of derivative transactions, and reduced access to debt
17
capital markets. The senior long-term and short-term debt
ratings and outlook currently assigned to unsecured company
securities by the rating agencies engaged by the company are
as follows:
Senior
Long-Term
Short-Term
Outlook
A2
A
Prime-1
A-1
Stable
Stable
Moody’s Investors
Service, Inc. .........................
Standard & Poor’s ..................
Trade accounts and notes receivable primarily arise from
sales of goods to independent dealers. Trade receivables
decreased by $170 million in 2011. The ratio of trade accounts
and notes receivable at October 31 to fiscal year net sales was
11 percent in 2011 and 15 percent in 2010. Total worldwide
agriculture and turf receivables decreased $311 million and
construction and forestry receivables increased $141 million.
The collection period for trade receivables averages less than
12 months. The percentage of trade receivables outstanding
for a period exceeding 12 months was 3 percent at October 31,
2011 and 2010.
Deere & Company’s stockholders’ equity was $6,800
million at October 31, 2011, compared with $6,290 million
at October 31, 2010. The increase of $510 million resulted
primarily from net income attributable to Deere & Company
of $2,800 million and an increase in common stock of $145
million, which were partially offset by an increase in treasury
stock of $1,503 million, dividends declared of $634 million and
a change in the retirement benefits adjustment of $338 million.
EQUIPMENT OPERATIONS
The company’s equipment businesses are capital intensive and
are subject to seasonal variations in financing requirements for
inventories and certain receivables from dealers. The equipment
operations sell a significant portion of their trade receivables
to financial services. To the extent necessary, funds provided
from operations are supplemented by external financing sources.
Cash provided by operating activities of the equipment
operations during 2011, including intercompany cash flows,
was $2,998 million primarily due to net income adjusted for
non-cash provisions, an increase in accounts payable and
accrued expenses and an increase in the net retirement benefits
liability, partially offset by an increase in inventories and trade
receivables.
Over the last three years, these operating activities,
including intercompany cash flows, have provided an aggregate
of $6,968 million in cash.
Trade receivables held by the equipment operations
increased by $94 million during 2011. The equipment operations sell a significant portion of their trade receivables
to financial services (see previous consolidated discussion).
Inventories increased by $1,308 million in 2011 primarily
reflecting the increase in production and sales. Most of these
inventories are valued on the last-in, first-out (LIFO) method.
The ratios of inventories on a first-in, first-out (FIFO) basis
(see Note 15), which approximates current cost, to fiscal year
cost of sales were 27 percent and 26 percent at October 31, 2011
and 2010, respectively.
18
Total interest-bearing debt of the equipment operations
was $3,696 million at the end of 2011, compared with $3,414
million at the end of 2010 and $3,563 million at the end of 2009.
The ratio of total debt to total capital (total interest-bearing
debt and stockholders’ equity) at the end of 2011, 2010 and
2009 was 35 percent, 35 percent and 43 percent, respectively.
Property and equipment cash expenditures for the
equipment operations in 2011 were $1,054 million, compared
with $736 million in 2010. Capital expenditures in 2012 are
estimated to be $1,200 million to $1,300 million.
FINANCIAL SERVICES
The financial services operations rely on their ability to raise
substantial amounts of funds to finance their receivable and lease
portfolios. Their primary sources of funds for this purpose are a
combination of commercial paper, term debt, securitization of
retail notes, equity capital and from time to time borrowings
from Deere & Company.
The cash provided by operating activities and financing
activities was used for investing activities. Cash flows from the
financial services’ operating activities, including intercompany
cash flows, were $1,065 million in 2011. Cash used by investing
activities totaled $3,231 million in 2011, primarily due to the
cost of receivables (excluding trade and wholesale) and cost of
equipment on operating leases exceeding collections of these
receivables and the proceeds from sales of equipment on
operating leases by $2,580 million and an increase in trade
receivables and wholesale notes of $562 million. Cash provided
by financing activities totaled $2,170 million in 2011,
representing primarily an increase in external borrowings of
$1,920 million and borrowings from Deere & Company of
$553 million, partially offset by $340 million of dividends paid
to Deere & Company. Cash and cash equivalents increased
$17 million.
Over the last three years, the financial services operating
activities, including intercompany cash flows, have provided
$3,236 million in cash. In addition, an increase in total
borrowings of $2,798 million and capital investment from
Deere & Company of $173 million provided cash inflows.
These amounts have been used mainly to fund receivables
(excluding trade and wholesale) and equipment on operating
lease acquisitions, which exceeded collections and the proceeds
from sales of equipment on operating leases by $4,564 million,
fund an increase in trade receivables and wholesale notes of
$1,552 million, pay dividends to Deere & Company of $557
million and fund purchases of property and equipment of
$147 million. Cash and cash equivalents decreased $717 million
over the three-year period.
Receivables and equipment on operating leases increased
by $2,945 million in 2011, compared with 2010. Total acquisition volumes of receivables (excluding trade and wholesale notes)
and cost of equipment on operating leases increased 12 percent
in 2011, compared with 2010. The volumes of financing leases,
retail notes, operating leases and revolving charge accounts
increased approximately 20 percent, 14 percent, 12 percent,
and 10 percent, respectively, while operating loans decreased
9 percent. The amount of wholesale notes increased 33 percent
and trade receivables decreased 6 percent during 2011.
At October 31, 2011 and 2010, net receivables and leases
administered, which include receivables administered but not
owned, were $27,918 million and $25,029 million, respectively.
Total external interest-bearing debt of the financial
services operations was $22,894 million at the end of 2011,
compared with $20,935 million at the end of 2010 and $20,988
million at the end of 2009. Total external borrowings have
changed generally corresponding with the level of the receivable
and lease portfolio, the level of cash and cash equivalents and the
change in payables owed to Deere & Company. The financial
services operations’ ratio of total interest-bearing debt to total
stockholder’s equity was 7.5 to 1 at the end of 2011, 7.1 to 1
at the end of 2010 and 7.2 to 1 at the end of 2009.
At October 31, 2011, Capital Corporation had a revolving
credit agreement to utilize bank conduit facilities to securitize
retail notes with a total capacity, or “financing limit,” of up to
$2,000 million of secured financings at any time. After a threeyear revolving period, unless the banks and Capital Corporation
agree to renew, Capital Corporation would liquidate the
secured borrowings over time as payments on the retail notes
are collected. At October 31, 2011, $1,384 million of secured
short-term borrowings was outstanding under the agreement.
During November 2011, the agreement was renewed and the
capacity of the agreement was increased to $2,750 million.
In April 2011, the financial services operations entered
into a $1,106 million public retail note securitization transaction. During 2011, the financial services operations also issued
$5,586 million and retired $3,209 million of long-term
borrowings, which were primarily medium-term notes.
OFF-BALANCE-SHEET ARRANGEMENTS
At October 31, 2011, the company had approximately
$230 million of guarantees issued primarily to banks outside the
U.S. related to third-party receivables for the retail financing
of John Deere equipment. The company may recover a portion
of any required payments incurred under these agreements from
repossession of the equipment collateralizing the receivables.
The maximum remaining term of the receivables guaranteed at
October 31, 2011 was approximately five years.
AGGREGATE CONTRACTUAL OBLIGATIONS
The payment schedule for the company’s contractual obligations
at October 31, 2011 in millions of dollars is as follows:
Total
Less
than
1 year
2&3
years
4&5
years
More
than
5 years
On-balance-sheet
Debt*
Equipment operations ..... $ 3,666 $ 528 $ 990 $
42 $ 2,106
Financial services** ....... 22,478
7,720 8,500 3,073 3,185
Total ......................... 26,144
Interest relating to debt ...... 3,740
Accounts payable .............. 2,942
Capital leases ....................
30
(continued)
8,248
748
2,819
5
9,490
798
83
8
3,115
590
36
3
5,291
1,604
4
14
Total
Less
than
1 year
Off-balance-sheet
Purchase obligations .......... $ 3,703 $ 3,672 $
Operating leases................
435
139
2&3
years
21 $
164
4&5
years
More
than
5 years
10
73 $
59
Total ................................ $36,994 $15,631 $10,564 $ 3,827 $ 6,972
* Principal payments.
** Notes payable of $2,777 million classified as short-term on the balance sheet
related to the securitization of retail notes are included in this table based on the
expected payment schedule (see Note 18).
The previous table does not include unrecognized tax
benefit liabilities of approximately $199 million at October 31,
2011 since the timing of future payments is not reasonably
estimable at this time (see Note 8). For additional information
regarding pension and other postretirement employee benefit
obligations, short-term borrowings, long-term borrowings and
lease obligations, see Notes 7, 18, 20 and 21, respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of the company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities,
revenues and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements.
The accounting policies below are those management believes
are the most critical to the preparation of the company’s financial
statements and require the most difficult, subjective or complex
judgments. The company’s other accounting policies are
described in the Notes to the Consolidated Financial Statements.
Sales Incentives
At the time a sale to a dealer is recognized, the company records
an estimate of the future sales incentive costs for allowances and
financing programs that will be due when the dealer sells the
equipment to a retail customer. The estimate is based on
historical data, announced incentive programs, field inventory
levels and retail sales volumes. The final cost of these programs
and the amount of accrual required for a specific sale are fully
determined when the dealer sells the equipment to the retail
customer. This is due to numerous programs available at any
particular time and new programs that may be announced after
the company records the sale. Changes in the mix and types of
programs affect these estimates, which are reviewed quarterly.
The sales incentive accruals at October 31, 2011, 2010
and 2009 were $1,122 million, $879 million and $806 million,
respectively. The increases in 2011 and 2010 were primarily
due to higher sales volumes.
The estimation of the sales incentive accrual is impacted
by many assumptions. One of the key assumptions is the
historical percent of sales incentive costs to retail sales from
dealers. Over the last five fiscal years, this percent has varied
by an average of approximately plus or minus .6 percent,
compared to the average sales incentive costs to retail sales
percent during that period. Holding other assumptions constant,
19
if this estimated cost experience percent were to increase or
decrease .6 percent, the sales incentive accrual at October 31,
2011 would increase or decrease by approximately $35 million.
Product Warranties
At the time a sale to a dealer is recognized, the company
records the estimated future warranty costs. The company
generally determines its total warranty liability by applying
historical claims rate experience to the estimated amount of
equipment that has been sold and is still under warranty based
on dealer inventories and retail sales. The historical claims rate
is primarily determined by a review of five-year claims costs
and consideration of current quality developments. Variances in
claims experience and the type of warranty programs affect
these estimates, which are reviewed quarterly.
The product warranty accruals, excluding extended
warranty unamortized premiums, at October 31, 2011, 2010
and 2009 were $662 million, $559 million and $513 million,
respectively. The changes were primarily due to higher sales
volumes in 2011 and 2010.
Estimates used to determine the product warranty accruals
are significantly affected by the historical percent of warranty
claims costs to sales. Over the last five fiscal years, this percent
has varied by an average of approximately plus or minus
.05 percent, compared to the average warranty costs to sales
percent during that period. Holding other assumptions constant,
if this estimated cost experience percent were to increase or
decrease .05 percent, the warranty accrual at October 31, 2011
would increase or decrease by approximately $20 million.
Postretirement Benefit Obligations
Pension obligations and other postretirement employee
benefit (OPEB) obligations are based on various assumptions
used by the company’s actuaries in calculating these amounts.
These assumptions include discount rates, health care cost trend
rates, expected return on plan assets, compensation increases,
retirement rates, mortality rates and other factors. Actual results
that differ from the assumptions and changes in assumptions
affect future expenses and obligations.
The pension liabilities, net of pension assets, recognized
on the balance sheet at October 31, 2011, 2010 and 2009 were
$1,373 million, $693 million and $1,307 million, respectively.
The OPEB liabilities, net of OPEB assets, on these same dates
were $5,193 million, $4,830 million and $4,652 million,
respectively. The increase in pension net liabilities in 2011
was primarily due to a decrease in discount rates, partially offset
by the return on plan assets. The decrease in the pension net
liabilities in 2010 was primarily due to the return on plan assets
and company contributions, partially offset by a decrease in
discount rates. The increases in the OPEB net liabilities in 2011
and 2010 were primarily due to the decreases in discount rates.
20
The effect of hypothetical changes to selected assumptions
on the company’s major U.S. retirement benefit plans would be
as follows in millions of dollars:
Assumptions
Percentage
Change
Pension
Discount rate** ................... +/-.5
Expected return
on assets ....................... +/-.5
OPEB
Discount rate** ................... +/-.5
Expected return
on assets ....................... +/-.5
Health care cost
trend rate** .................... +/-1.0
October
31, 2011 _________
2012
______________
Increase
Increase
(Decrease)
(Decrease)
PBO/APBO*
Expense
$ (502)/530
$ (22)/21
(45)/45
(397)/421
(54)/56
(6)/6
886/(683)
199/(152)
* Projected benefit obligation (PBO) for pension plans and accumulated postretirement
benefit obligation (APBO) for OPEB plans.
** Pretax impact on service cost, interest cost and amortization of gains or losses.
Goodwill
Goodwill is not amortized and is tested for impairment annually
and when events or circumstances change such that it is more
likely than not that the fair value of a reporting unit is reduced
below its carrying amount. The end of the third quarter is the
annual measurement date. To test for goodwill impairment,
the carrying value of each reporting unit is compared with its
fair value. If the carrying value of the goodwill is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the implied fair value of the goodwill.
An estimate of the fair value of the reporting unit is
determined through a combination of comparable market values
for similar businesses and discounted cash flows. These estimates
can change significantly based on such factors as the reporting
unit’s financial performance, economic conditions, interest
rates, growth rates, pricing, changes in business strategies and
competition.
Based on this testing, the company identified one
reporting unit in 2010 and one reporting unit in 2009 for
which the goodwill was impaired. None were impaired in
2011. In the fourth quarter of 2010 and 2009, the company
recorded a non-cash pretax charge in cost of sales of $27 million
($25 million after-tax) and $289 million ($274 million after-tax),
respectively. The charges were related to write-downs of the
goodwill associated with reporting units included in the
agriculture and turf operating segment. The key factor contributing to the impairments was a decline in the reporting units’
forecasted financial performance (see Note 5).
A 10 percent decrease in the estimated fair value of the
company’s reporting units would have had no impact on the
carrying value of goodwill at the annual measurement date in
2011.
Allowance for Credit Losses
The allowance for credit losses represents an estimate of
the losses expected from the company’s receivable portfolio.
The level of the allowance is based on many quantitative
and qualitative factors, including historical loss experience
by product category, portfolio duration, delinquency trends,
economic conditions and credit risk quality. The adequacy
of the allowance is assessed quarterly. Different assumptions or
changes in economic conditions would result in changes to the
allowance for credit losses and the provision for credit losses.
The total allowance for credit losses at October 31, 2011,
2010 and 2009 was $269 million, $296 million and $316 million,
respectively. The decreases in 2011 and 2010 were primarily
due to decreases in loss experience.
The assumptions used in evaluating the company’s
exposure to credit losses involve estimates and significant
judgment. The historical loss experience on the receivable
portfolio represents one of the key assumptions involved in
determining the allowance for credit losses. Over the last five
fiscal years, this percent has varied by an average of approximately plus or minus .18 percent, compared to the average
loss experience percent during that period. Holding other
assumptions constant, if this estimated loss experience on the
receivable portfolio were to increase or decrease .18 percent,
the allowance for credit losses at October 31, 2011 would
increase or decrease by approximately $50 million.
Operating Lease Residual Values
The carrying value of equipment on operating leases is affected
by the estimated fair values of the equipment at the end of the
lease (residual values). Upon termination of the lease, the
equipment is either purchased by the lessee or sold to a third
party, in which case the company may record a gain or a loss
for the difference between the estimated residual value and the
sales price. The residual values are dependent on current
economic conditions and are reviewed quarterly. Changes in
residual value assumptions would affect the amount of depreciation expense and the amount of investment in equipment on
operating leases.
The total operating lease residual values at October 31,
2011, 2010 and 2009 were $1,425 million, $1,276 million and
$1,128 million, respectively. The changes in 2011 and 2010
were primarily due to the increasing levels of operating leases.
Estimates used in determining end of lease market values
for equipment on operating leases significantly impact the
amount and timing of depreciation expense. If future market
values for this equipment were to decrease 10 percent from
the company’s present estimates, the total impact would be
to increase the company’s annual depreciation for equipment
on operating leases by approximately $50 million.
FINANCIAL INSTRUMENT MARKET RISK INFORMATION
The company is naturally exposed to various interest rate and
foreign currency risks. As a result, the company enters into
derivative transactions to manage certain of these exposures that
arise in the normal course of business and not for the purpose of
creating speculative positions or trading. The company’s
financial services manage the relationship of the types and
amounts of their funding sources to their receivable and lease
portfolio in an effort to diminish risk due to interest rate and
foreign currency fluctuations, while responding to favorable
financing opportunities. Accordingly, from time to time, these
operations enter into interest rate swap agreements to manage
their interest rate exposure. The company also has foreign
currency exposures at some of its foreign and domestic operations related to buying, selling and financing in currencies other
than the local currencies. The company has entered into
agreements related to the management of these foreign currency
transaction risks.
Interest Rate Risk
Quarterly, the company uses a combination of cash flow models
to assess the sensitivity of its financial instruments with interest
rate exposure to changes in market interest rates. The models
calculate the effect of adjusting interest rates as follows.
Cash flows for financing receivables are discounted at the
current prevailing rate for each receivable portfolio. Cash flows
for marketable securities are primarily discounted at the
applicable benchmark yield curve plus market credit spreads.
Cash flows for unsecured borrowings are discounted at the
applicable benchmark yield curve plus market credit spreads for
similarly rated borrowers. Cash flows for securitized borrowings
are discounted at the swap yield curve plus a market credit
spread for similarly rated borrowers. Cash flows for interest rate
swaps are projected and discounted using forward rates from the
swap yield curve at the repricing dates. The net loss in these
financial instruments’ fair values which would be caused by
increasing the interest rates by 10 percent from the market rates
at October 31, 2011 would have been approximately $42 million.
The net loss from decreasing the interest rates by 10 percent at
October 31, 2010 would have been approximately $3 million.
Foreign Currency Risk
In the equipment operations, the company’s practice is to hedge
significant currency exposures. Worldwide foreign currency
exposures are reviewed quarterly. Based on the equipment
operations’ anticipated and committed foreign currency cash
inflows, outflows and hedging policy for the next twelve
months, the company estimates that a hypothetical 10 percent
strengthening of the U.S. dollar relative to other currencies
through 2012 would decrease the 2012 expected net cash
inflows by $19 million. At October 31, 2010, a hypothetical
10 percent weakening of the U.S. dollar under similar assumptions and calculations indicated a potential $15 million adverse
effect on the 2011 net cash inflows.
In the financial services operations, the company’s
policy is to hedge the foreign currency risk if the currency of
the borrowings does not match the currency of the receivable
portfolio. As a result, a hypothetical 10 percent adverse change
in the value of the U.S. dollar relative to all other foreign
currencies would not have a material effect on the financial
services cash flows.
21
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The management of Deere & Company is responsible for
establishing and maintaining adequate internal control over
financial reporting. Deere & Company’s internal control system
was designed to provide reasonable assurance regarding the
preparation and fair presentation of published financial statements
in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation
in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the company’s
internal control over financial reporting as of October 31, 2011,
using the criteria set forth in Internal Control – Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that
assessment, management believes that, as of October 31, 2011,
the company’s internal control over financial reporting was
effective.
The company’s independent registered public accounting
firm has issued an audit report on the effectiveness of the
company’s internal control over financial reporting. This report
appears below.
December 19, 2011
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Deere & Company:
We have audited the accompanying consolidated balance sheets
of Deere & Company and subsidiaries (the “Company”) as of
October 31, 2011 and 2010, and the related statements of
consolidated income, changes in consolidated stockholders’
equity, and consolidated cash flows for each of the three years
in the period ended October 31, 2011. We also have audited
the Company’s internal control over financial reporting as of
October 31, 2011, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
The Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on these financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding
22
of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control
over financial reporting, including the possibility of collusion
or improper management override of controls, material
misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of the Company as of October 31, 2011 and
2010, and the results of their operations and their cash flows for
each of the three years in the period ended October 31, 2011,
in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of October 31, 2011, based on the
criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Deloitte & Touche LLP
Chicago, Illinois
December 19, 2011
Deere & Company
STATEMENT OF CONSOLIDATED INCOME
For the Years Ended October 31, 2011, 2010 and 2009
(In millions of dollars and shares except per share amounts)
2011
_______
2010
_______
2009
_______
$ 29,466.1
1,922.6
623.8
$ 23,573.2
1,825.3
606.1
$ 20,756.1
1,842.1
514.2
Total .....................................................................................................................................................
32,012.5
26,004.6
23,112.4
Costs and Expenses
Cost of sales ..............................................................................................................................................
Research and development expenses ..........................................................................................................
Selling, administrative and general expenses ...............................................................................................
Interest expense .........................................................................................................................................
Other operating expenses ...........................................................................................................................
21,919.4
1,226.2
3,168.7
759.4
716.0
17,398.8
1,052.4
2,968.7
811.4
748.1
16,255.2
977.0
2,780.6
1,042.4
718.0
Total .....................................................................................................................................................
27,789.7
22,979.4
21,773.2
Income of Consolidated Group before Income Taxes ..........................................................................
Provision for income taxes ..........................................................................................................................
4,222.8
1,423.6
3,025.2
1,161.6
1,339.2
460.0
Income of Consolidated Group...............................................................................................................
Equity in income (loss) of unconsolidated affiliates .......................................................................................
2,799.2
8.6
1,863.6
10.7
879.2
(6.3)
Net Income ..............................................................................................................................................
Less: Net income (loss) attributable to noncontrolling interests.................................................................
2,807.8
7.9
1,874.3
9.3
872.9
(.6)
Net Income Attributable to Deere & Company ......................................................................................
$ 2,799.9
$ 1,865.0
$
873.5
Per Share Data
Basic .........................................................................................................................................................
Diluted .......................................................................................................................................................
Dividends declared .....................................................................................................................................
$
$
$
$
$
$
$
$
$
2.07
2.06
1.12
Net Sales and Revenues
Net sales ....................................................................................................................................................
Finance and interest income .......................................................................................................................
Other income .............................................................................................................................................
Average Shares Outstanding
Basic .........................................................................................................................................................
Diluted .......................................................................................................................................................
6.71
6.63
1.52
417.4
422.4
4.40
4.35
1.16
424.0
428.6
422.8
424.4
The notes to consolidated financial statements are an integral part of this statement.
23
Deere & Company
CONSOLIDATED BALANCE SHEET
As of October 31, 2011 and 2010
(In millions of dollars except per share amounts)
2011
_________
2010
_________
$
3,647.2
787.3
48.0
3,294.5
19,923.5
2,905.0
1,330.6
2,150.0
4,370.6
4,352.3
201.7
999.8
127.4
30.4
2,858.6
1,180.5
$ 3,790.6
227.9
38.8
3,464.2
17,682.2
2,238.3
925.6
1,936.2
3,063.0
3,790.7
244.5
998.6
117.0
146.7
2,477.1
1,194.0
931.4
$ 48,207.4
$ 43,266.8
LIABILITIES
Short-term borrowings ...........................................................................................................................................
Short-term securitization borrowings ......................................................................................................................
Payables to unconsolidated affiliates ......................................................................................................................
Accounts payable and accrued expenses................................................................................................................
Deferred income taxes ...........................................................................................................................................
Long-term borrowings ...........................................................................................................................................
Retirement benefits and other liabilities ..................................................................................................................
$ 6,852.3
2,777.4
117.7
7,804.8
168.3
16,959.9
6,712.1
$ 5,325.7
2,208.8
203.5
6,481.7
144.3
16,814.5
5,784.9
Total liabilities ...........................................................................................................................................
41,392.5
36,963.4
3,251.7
(7,292.8)
14,519.4
3,106.3
(5,789.5)
12,353.1
(4,135.4)
453.8
(8.3)
11.9
(3,797.0)
436.0
(29.2)
10.6
Accumulated other comprehensive income (loss) ............................................................................................
(3,678.0)
(3,379.6)
Total Deere & Company stockholders’ equity ..........................................................................................................
Noncontrolling interests .........................................................................................................................................
6,800.3
14.6
6,290.3
13.1
ASSETS
Cash and cash equivalents.....................................................................................................................................
Marketable securities ............................................................................................................................................
Receivables from unconsolidated affiliates ..............................................................................................................
Trade accounts and notes receivable - net ..............................................................................................................
Financing receivables - net ....................................................................................................................................
Financing receivables securitized - net ...................................................................................................................
Other receivables ..................................................................................................................................................
Equipment on operating leases - net ......................................................................................................................
Inventories ............................................................................................................................................................
Property and equipment - net ................................................................................................................................
Investments in unconsolidated affiliates ..................................................................................................................
Goodwill ................................................................................................................................................................
Other intangible assets - net ..................................................................................................................................
Retirement benefits ...............................................................................................................................................
Deferred income taxes ...........................................................................................................................................
Other assets..........................................................................................................................................................
Assets held for sale ...............................................................................................................................................
Total Assets ........................................................................................................................................................
LIABILITIES AND STOCKHOLDERS’ EQUITY
Commitments and contingencies (Note 22)
STOCKHOLDERS’ EQUITY
Common stock, $1 par value (authorized – 1,200,000,000 shares;
issued – 536,431,204 shares in 2011 and 2010), at paid-in amount..................................................................
Common stock in treasury, 130,361,345 shares in 2011 and 114,250,815 shares in 2010, at cost .........................
Retained earnings..................................................................................................................................................
Accumulated other comprehensive income (loss):
Retirement benefits adjustment..........................................................................................................................
Cumulative translation adjustment......................................................................................................................
Unrealized loss on derivatives ............................................................................................................................
Unrealized gain on investments. .........................................................................................................................
Total stockholders’ equity ..............................................................................................................................
6,814.9
6,303.4
Total Liabilities and Stockholders’ Equity .......................................................................................................
$ 48,207.4
$ 43,266.8
The notes to consolidated financial statements are an integral part of this statement.
24
Deere & Company
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Years Ended October 31, 2011, 2010 and 2009
(In millions of dollars)
Cash Flows from Operating Activities
Net income.................................................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful receivables ............................................................................................................
Provision for depreciation and amortization..............................................................................................
Goodwill impairment charges ..................................................................................................................
Share-based compensation expense .......................................................................................................
Undistributed earnings of unconsolidated affiliates ...................................................................................
Provision (credit) for deferred income taxes .............................................................................................
Changes in assets and liabilities:
Trade, notes and financing receivables related to sales.........................................................................
Inventories .........................................................................................................................................
Accounts payable and accrued expenses.............................................................................................
Accrued income taxes payable/receivable ...........................................................................................
Retirement benefits ............................................................................................................................
Other .....................................................................................................................................................
Net cash provided by operating activities.........................................................................................
2011
_________
2010
________
2009
________
$ 2,807.8
$ 1,874.3
$
13.5
914.9
69.0
11.1
(168.0)
106.4
914.8
27.2
71.2
(2.2)
175.0
231.8
873.3
289.2
70.5
7.0
171.6
(808.9)
(1,730.5)
1,287.0
1.2
495.3
(566.1)
(1,100.6)
(1,052.7)
1,057.7
22.1
(154.1)
343.1
481.8
452.5
(1,168.3)
(234.2)
(27.9)
(35.4)
2,326.3
2,282.2
1,984.8
12,151.4
32.4
683.4
11,252.0
825.1
477.3
(11,234.2)
(29.5)
(906.7)
(401.4)
(49.8)
10.2
872.9
Cash Flows from Investing Activities
Collections of receivables (excluding receivables related to sales) .................................................................
Proceeds from maturities and sales of marketable securities ........................................................................
Proceeds from sales of equipment on operating leases ................................................................................
Government grants related to property and equipment .................................................................................
Proceeds from sales of businesses, net of cash sold ....................................................................................
Cost of receivables acquired (excluding receivables related to sales) .............................................................
Purchases of marketable securities .............................................................................................................
Purchases of property and equipment .........................................................................................................
Cost of equipment on operating leases acquired ..........................................................................................
Acquisitions of businesses, net of cash acquired ..........................................................................................
Other .........................................................................................................................................................
911.1
(13,956.8)
(586.9)
(1,056.6)
(624.2)
(60.8)
(113.7)
11,047.1
38.4
621.9
92.3
34.9
(12,493.9)
(63.4)
(761.7)
(551.1)
(45.5)
(28.1)
Net cash used for investing activities ..............................................................................................
(2,620.7)
(2,109.1)
(57.0)
Cash Flows from Financing Activities
Increase (decrease) in total short-term borrowings.......................................................................................
Proceeds from long-term borrowings...........................................................................................................
Payments of long-term borrowings ..............................................................................................................
Proceeds from issuance of common stock ...................................................................................................
Repurchases of common stock ...................................................................................................................
Dividends paid ............................................................................................................................................
Excess tax benefits from share-based compensation ...................................................................................
Other .........................................................................................................................................................
(226.1)
5,655.0
(3,220.8)
170.0
(1,667.0)
(593.1)
70.1
(48.5)
756.0
2,621.1
(3,675.7)
129.1
(358.8)
(483.5)
43.5
(41.4)
(1,384.8)
6,282.8
(3,830.3)
16.5
(3.2)
(473.4)
4.6
(141.9)
Net cash provided by (used for) financing activities ..........................................................................
139.6
(1,009.7)
470.3
Effect of Exchange Rate Changes on Cash and Cash Equivalents ......................................................
11.4
(24.5)
42.2
Net Increase (Decrease) in Cash and Cash Equivalents ......................................................................
Cash and Cash Equivalents at Beginning of Year .................................................................................
(143.4)
3,790.6
(861.1)
4,651.7
2,440.3
2,211.4
Cash and Cash Equivalents at End of Year............................................................................................
$ 3,647.2
$ 3,790.6
$ 4,651.7
The notes to consolidated financial statements are an integral part of this statement.
25
Deere & Company
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS’ EQUITY
For the Years Ended October 31, 2009, 2010 and 2011
(In millions of dollars)
Deere & Company Stockholders
Total
Stockholders’
Equity
Comprehensive
Income
(Loss)
Balance October 31, 2008 .......................... $ 6,537.2
872.9
Treasury
Stock
Retained
Earnings
$ 2,934.0 $ (5,594.6) $ 10,580.6
Net income (loss) .......................................
Other comprehensive income (loss)
Retirement benefits adjustment ..............
Cumulative translation adjustment ..........
Unrealized loss on derivatives .................
Unrealized gain on investments ...............
$
873.5
(2,536.6)
327.4
(4.0)
7.8
(2,536.6)
326.8
(4.0)
7.8
$ (1,332.5)
$ (1,387.3)
Noncontrolling
Interests
$
873.5
Total comprehensive income .................
(1,332.5)
(3.2)
33.1
(473.6)
61.8
62.2
Balance October 31, 2009 ..........................
4,822.8
2,996.2
Net income ................................................
Other comprehensive income (loss)
Retirement benefits adjustment ..............
Cumulative translation adjustment ..........
Unrealized gain on derivatives .................
Unrealized gain on investments ...............
1,874.3
$ 1,865.0
158.0
35.7
14.9
5.0
158.0
35.8
14.9
5.0
Total comprehensive income .................
2,087.9
$ 2,078.7
Repurchases of common stock .......................
Treasury shares reissued ................................
Dividends declared .........................................
Stock options and other ..................................
(358.8)
134.0
(492.7)
110.2
110.1
Balance October 31, 2010 ...........................
6,303.4
3,106.3
Net income ................................................
Other comprehensive income (loss)
Retirement benefits adjustment ..............
Cumulative translation adjustment ..........
Unrealized gain on derivatives .................
Unrealized gain on investments ...............
2,807.8
$ 2,799.9
(338.4)
17.8
20.9
1.3
(338.4)
17.8
20.9
1.3
Total comprehensive income .................
2,509.4
$ 2,501.5
Repurchases of common stock .......................
Treasury shares reissued ................................
Dividends declared .........................................
Stock options and other ..................................
(1,667.0)
163.7
(638.0)
143.4
4.5
(.6)
(2,536.6)
326.8
(4.0)
7.8
Repurchases of common stock .......................
Treasury shares reissued ................................
Dividends declared .........................................
Stock options and other ..................................
.6
(3.2)
33.1
(473.6)
(.4)
(5,564.7)
10,980.5
(3,593.3)
4.1
1,865.0
9.3
158.0
35.8
14.9
5.0
(.1)
9.2
(358.8)
134.0
Balance October 31, 2011 ........................... $ 6,814.9
The notes to consolidated financial statements are an integral part of this statement.
26
Common
Stock
Accumulated
Other
Comprehensive
Income (Loss)
(492.3)
(.1)
(5,789.5)
12,353.1
(.4)
.2
(3,379.6)
13.1
2,799.9
7.9
(338.4)
17.8
20.9
1.3
7.9
(1,667.0)
163.7
145.4
(633.5)
(.1)
$ 3,251.7 $ (7,292.8) $ 14,519.4
(4.5)
(1.9)
$ (3,678.0)
$
14.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIzATION AND CONSOLIDATION
Structure of Operations
The information in the notes and related commentary are
presented in a format which includes data grouped as follows:
Equipment Operations – Includes the company’s
agriculture and turf operations and construction and forestry
operations with financial services reflected on the equity basis.
Financial Services – Includes the company’s financial
services operations, which consist of the previous credit
segment and the “Other” segment that was combined at the
beginning of fiscal year 2011 into the financial services segment.
The “Other” segment consisted of an insurance business that
did not meet the materiality threshold of reporting. It was
previously included as a separate segment in “Financial Services”
(see Note 28).
Consolidated – Represents the consolidation of the
equipment operations and financial services. References to
“Deere & Company” or “the company” refer to the entire
enterprise.
Principles of Consolidation
The consolidated financial statements represent primarily the
consolidation of all companies in which Deere & Company
has a controlling interest. Certain variable interest entities
(VIEs) are consolidated since the company has both the power
to direct the activities that most significantly impact the VIEs’
economic performance and the obligation to absorb losses or
the right to receive benefits that could potentially be significant
to the VIEs. Deere & Company records its investment in each
unconsolidated affiliated company (generally 20 to 50 percent
ownership) at its related equity in the net assets of such affiliate
(see Note 10). Other investments (less than 20 percent ownership) are recorded at cost.
Reclassifications
Certain items previously reported in specific financial statement
captions have been reclassified to conform to the 2011 financial
statement presentation. Short-term securitization borrowings
have been shown separately from other short-term borrowings
on the Consolidated Balance Sheet as a result of the adoption
of Financial Accounting Standards Board (FASB) Accounting
Standards Update (ASU) No. 2009-17 (see Note 3). In the
Supplemental Consolidating Data in Note 31, the costs and
collections of trade receivables and wholesale notes for the
financial services statement of cash flows investing activities
have been presented on a net basis. These receivables have
short durations with a high turnover rate. The total cash flows
for the financial services investing activities have not changed.
The presentation of these receivables on the Statement of
Consolidated Cash Flows has also not changed and continues
to be shown as an adjustment to net income in the operating
activities since they are related to sales.
Variable Interest Entities
The company is the primary beneficiary of and consolidates a
VIE based on a cost sharing supply contract. The company has
both the power to direct the activities that most significantly
impact the VIE’s economic performance and the obligation to
absorb losses or the right to receive benefits that could potentially be significant to the VIE. No additional support beyond
what was previously contractually required has been provided
during any periods presented. The VIE produces blended
fertilizer and other lawn care products for the agriculture and
turf segment.
The assets and liabilities of this supplier VIE consisted of
the following at October 31 in millions of dollars:
2011
Cash and cash equivalents........................................... $
Intercompany receivables.............................................
Inventories ..................................................................
Property and equipment – net ......................................
Other assets................................................................
2010
11
14
30
3
3
$
5
10
32
4
6
Total assets ................................................................. $
61
$
57
Accounts payable and accrued expenses ...................... $
56
$
55
Total liabilities .............................................................. $
56
$
55
The VIE is financed primarily through its own liabilities.
The assets of the VIE can only be used to settle the obligations
of the VIE. The creditors of the VIE do not have recourse to
the general credit of the company.
The company previously consolidated certain wind energy
entities that were VIEs, which invested in wind farms that own
and operate turbines to generate electrical energy. In December
2010, the company sold John Deere Renewables, LLC, which
included these VIEs and other wind energy entities. The assets
of these VIEs were classified as held for sale at October 31, 2010
(see Note 4). No additional support to the VIEs beyond what
was previously contractually required has been provided during
any periods presented.
The assets and liabilities of these wind energy VIEs
consisted of the following at October 31 in millions of dollars:
2010
Total assets held for sale* ............................................................... $
133
Intercompany borrowings ................................................................ $
Accounts payable and accrued expenses .........................................
50
5
Total liabilities ................................................................................. $
55
* Included $129 million property and equipment and $4 million other assets.
The VIEs were financed primarily through intercompany
borrowings and equity. The VIEs’ assets were pledged as security
interests for the intercompany borrowings. The remaining
creditors of the VIEs did not have recourse to the general credit
of the company.
See Note 13 for VIEs related to securitization of financing
receivables.
27
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following are significant accounting policies in addition
to those included in other notes to the consolidated financial
statements.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the
reported amounts and related disclosures. Actual results could
differ from those estimates.
Revenue Recognition
Sales of equipment and service parts are recorded when the sales
price is determinable and the risks and rewards of ownership are
transferred to independent parties based on the sales agreements
in effect. In the U.S. and most international locations, this transfer
occurs primarily when goods are shipped. In Canada and some
other international locations, certain goods are shipped to dealers
on a consignment basis under which the risks and rewards of
ownership are not transferred to the dealer. Accordingly, in
these locations, sales are not recorded until a retail customer has
purchased the goods. In all cases, when a sale is recorded by the
company, no significant uncertainty exists surrounding the
purchaser’s obligation to pay. No right of return exists on sales
of equipment. Service parts returns are estimable and accrued at
the time a sale is recognized. The company makes appropriate
provisions based on experience for costs such as doubtful
receivables, sales incentives and product warranty.
Financing revenue is recorded over the lives of related
receivables using the interest method. Insurance premiums
recorded in other income are generally recognized in proportion
to the costs expected to be incurred over the contract period.
Deferred costs on the origination of financing receivables are
recognized as a reduction in finance revenue over the expected
lives of the receivables using the interest method. Income and
deferred costs on the origination of operating leases are recognized on a straight-line basis over the scheduled lease terms in
finance revenue.
Sales Incentives
At the time a sale is recognized, the company records an
estimate of the future sales incentive costs for allowances
and financing programs that will be due when a dealer sells
the equipment to a retail customer. The estimate is based on
historical data, announced incentive programs, field inventory
levels and retail sales volumes.
Product Warranties
At the time a sale is recognized, the company records the
estimated future warranty costs. These costs are usually
estimated based on historical warranty claims (see Note 22).
Sales Taxes
The company collects and remits taxes assessed by different
governmental authorities that are both imposed on and
concurrent with revenue producing transactions between the
company and its customers. These taxes may include sales, use,
value-added and some excise taxes. The company reports the
collection of these taxes on a net basis (excluded from revenues).
28
Shipping and Handling Costs
Shipping and handling costs related to the sales of the company’s
equipment are included in cost of sales.
Advertising Costs
Advertising costs are charged to expense as incurred. This expense
was $163 million in 2011, $154 million in 2010 and $175 million
in 2009.
Depreciation and Amortization
Property and equipment, capitalized software and other
intangible assets are stated at cost less accumulated depreciation
or amortization. These assets are depreciated over their estimated useful lives generally using the straight-line method.
Equipment on operating leases is depreciated over the terms of
the leases using the straight-line method. Property and equipment expenditures for new and revised products, increased
capacity and the replacement or major renewal of significant
items are capitalized. Expenditures for maintenance, repairs and
minor renewals are generally charged to expense as incurred.
Securitization of Receivables
Certain financing receivables are periodically transferred to
special purpose entities (SPEs) in securitization transactions
(see Note 13). These securitizations qualify as collateral for
secured borrowings and no gains or losses are recognized at the
time of securitization. The receivables remain on the balance
sheet and are classified as “Financing receivables securitized
- net.” The company recognizes finance income over the lives
of these receivables using the interest method.
Receivables and Allowances
All financing and trade receivables are reported on the balance
sheet at outstanding principal adjusted for any charge-offs,
the allowance for credit losses and doubtful accounts, and any
deferred fees or costs on originated financing receivables.
Allowances for credit losses and doubtful accounts are maintained in amounts considered to be appropriate in relation to
the receivables outstanding based on collection experience,
economic conditions and credit risk quality. Receivables are
written-off to the allowance when the account is considered
uncollectible.
Impairment of Long-Lived Assets, Goodwill and
Other Intangible Assets
The company evaluates the carrying value of long-lived assets
(including property and equipment, goodwill and other
intangible assets) when events or circumstances warrant such
a review. Goodwill and intangible assets with indefinite lives
are tested for impairment annually at the end of the third fiscal
quarter each year, or more often if events or circumstances
indicate a reduction in the fair value below the carrying value.
Goodwill is allocated and reviewed for impairment by reporting
units, which consist primarily of the operating segments and
certain other reporting units. The goodwill is allocated to the
reporting unit in which the business that created the goodwill
resides. To test for goodwill impairment, the carrying value of
each reporting unit is compared with its fair value. If the
carrying value of the goodwill or long-lived asset is considered
impaired, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset (see Note 5).
Derivative Financial Instruments
It is the company’s policy that derivative transactions are
executed only to manage exposures arising in the normal course
of business and not for the purpose of creating speculative
positions or trading. The company’s financial services manage the
relationship of the types and amounts of their funding sources
to their receivable and lease portfolio in an effort to diminish
risk due to interest rate and foreign currency fluctuations, while
responding to favorable financing opportunities. The company
also has foreign currency exposures at some of its foreign and
domestic operations related to buying, selling and financing in
currencies other than the functional currencies.
All derivatives are recorded at fair value on the balance
sheet. Cash collateral received or paid is not offset against the
derivative fair values on the balance sheet. Each derivative is
designated as either a cash flow hedge, a fair value hedge, or
remains undesignated. Changes in the fair value of derivatives
that are designated and effective as cash flow hedges are recorded
in other comprehensive income and reclassified to the income
statement when the effects of the item being hedged are
recognized in the income statement. Changes in the fair value of
derivatives that are designated and effective as fair value hedges
are recognized currently in net income. These changes are offset
in net income to the extent the hedge was effective by fair value
changes related to the risk being hedged on the hedged item.
Changes in the fair value of undesignated hedges are recognized
currently in the income statement. All ineffective changes in
derivative fair values are recognized currently in net income.
All designated hedges are formally documented as to the
relationship with the hedged item as well as the risk-management
strategy. Both at inception and on an ongoing basis the hedging
instrument is assessed as to its effectiveness. If and when a
derivative is determined not to be highly effective as a hedge,
or the underlying hedged transaction is no longer likely to
occur, or the hedge designation is removed, or the derivative
is terminated, the hedge accounting discussed above is discontinued (see Note 27).
Foreign Currency Translation
The functional currencies for most of the company’s foreign
operations are their respective local currencies. The assets and
liabilities of these operations are translated into U.S. dollars at
the end of the period exchange rates. The revenues and
expenses are translated at weighted-average rates for the period.
The gains or losses from these translations are recorded in
other comprehensive income. Gains or losses from transactions
denominated in a currency other than the functional currency
of the subsidiary involved and foreign exchange forward
contracts are included in net income. The pretax net losses for
foreign exchange in 2011, 2010 and 2009 were $121 million,
$75 million and $68 million, respectively.
3. NEW ACCOUNTING STANDARDS
New Accounting Standards Adopted
In the first quarter of 2011, the company adopted FASB ASU
No. 2009-16, Accounting for Transfers of Financial Assets,
which amends Accounting Standards Codification (ASC) 860,
Transfers and Servicing (FASB Statement No. 166, Accounting
for Transfers of Financial Assets an amendment of FASB
Statement No. 140). This ASU eliminates the qualifying special
purpose entities from the consolidation guidance and clarifies
the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. It requires
additional disclosures about the risks from continuing involvement in transferred financial assets accounted for as sales.
The adoption did not have a material effect on the company’s
consolidated financial statements.
In the first quarter of 2011, the company adopted FASB
ASU No. 2009-17, Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities, which
amends ASC 810, Consolidation (FASB Statement No. 167,
Amendments to FASB Interpretation No. 46(R)). This ASU
requires a qualitative analysis to determine the primary beneficiary of a VIE. The analysis identifies the primary beneficiary
as the enterprise that has both the power to direct the activities
of a VIE that most significantly impact the VIE’s economic
performance and the obligation to absorb losses or the right
to receive benefits that could be significant to the VIE.
The adoption did not have a material effect on the company’s
consolidated financial statements.
In the first quarter of 2011, the company adopted FASB
ASU No. 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses,
which amends ASC 310, Receivables. This ASU requires
disclosures related to financing receivables and the allowance
for credit losses by portfolio segment. The ASU also requires
disclosures of information regarding the credit quality, aging,
nonaccrual status and impairments by class of receivable.
A portfolio segment is the level at which a creditor develops a
systematic methodology for determining its credit allowance.
A receivable class is a subdivision of a portfolio segment with
similar measurement attributes, risk characteristics and common
methods to monitor and assess credit risk. The adoption did
not have a material effect on the company’s consolidated
financial statements.
In the fourth quarter of 2011, the company adopted FASB
ASU No. 2011-02, A Creditor’s Determination of Whether a
Restructuring Is a Troubled Debt Restructuring, which amends
ASC 310, Receivables. This ASU states that a troubled debt
restructuring occurs when a creditor grants a concession it
would not otherwise consider to a debtor that is experiencing
financial difficulties. Certain disclosures are required for
transactions that qualify as troubled debt restructurings.
The adoption did not have a material effect on the company’s
consolidated financial statements.
New Accounting Standards to be Adopted
In January 2010, the FASB issued ASU No. 2010-06,
Improving Disclosures about Fair Value Measurements, which
amends ASC 820, Fair Value Measurements and Disclosures.
This ASU requires disclosures of transfers into and out of Levels
1 and 2, more detailed roll forward reconciliations of Level 3
recurring fair value measurements on a gross basis, fair value
information by class of assets and liabilities, and descriptions of
valuation techniques and inputs for Level 2 and 3 measurements.
29
The effective date was the second quarter of fiscal year 2010
except for the roll forward reconciliations, which are required
in the first quarter of fiscal year 2012. The adoption in 2010 did
not have a material effect and the future adoption will not have
a material effect on the company’s consolidated financial
statements.
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs, which
amends ASC 820, Fair Value Measurement. This ASU requires
the categorization by level for items that are required to be
disclosed at fair value and information about transfers between
Level 1 and Level 2 and additional disclosure for Level 3
measurements. In addition, the ASU provides guidance on
measuring the fair value of financial instruments managed within
a portfolio and the application of premiums and discounts on
fair value measurements. The effective date will be the second
quarter of fiscal year 2012. The adoption will not have a material
effect on the company’s consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income, which amends ASC
220, Comprehensive Income. This ASU requires the presentation of total comprehensive income, total net income and the
components of net income and comprehensive income either
in a single continuous statement or in two separate but consecutive statements. The requirements do not change how
earnings per share is calculated or presented. The effective date
will be the first quarter of fiscal year 2013 and must be applied
retrospectively. The adoption will not have a material effect on
the company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,
Testing Goodwill for Impairment, which amends ASC 350,
Intangibles - Goodwill and Other. This ASU gives an entity the
option to first assess qualitative factors to determine if goodwill
is impaired. The entity may first determine based on qualitative
factors if it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including
goodwill. If that assessment indicates no impairment, the first
and second steps of the quantitative goodwill impairment test
are not required. The effective date will be the first quarter of
fiscal year 2013 with early adoption permitted. The adoption
will not have a material effect on the company’s consolidated
financial statements.
4. ACQUISITIONS AND DISPOSITIONS
In December 2010, the company acquired the remaining
64 percent ownership interest in A&I Products, Inc., a manufacturer and wholesale distributor of replacement parts, for
approximately $48 million. The fair values assigned to the total
assets and liabilities related to the acquired entity were approximately $8 million of receivables, $52 million of inventories,
$22 million of property and equipment, $18 million of identifiable intangible assets, $3 million of other assets, $8 million of
accounts payable and accrued expenses, $4 million of short-term
30
borrowings, $9 million of deferred tax liabilities and $11 million
of long-term borrowings. The goodwill generated in the
transaction was not significant. The identifiable intangibles were
primarily related to customer lists and relationships, which have
amortization periods with a weighted average of six years.
The fair value at acquisition date of the original equity interest
was $23 million. The remeasurement of the equity interest from
the previous carrying value to fair value was not significant.
The entity was consolidated and the results of these operations
have been included in the company’s consolidated financial
statements in the agriculture and turf segment since the date of
the acquisition. The pro forma results of operations as if the
acquisition had occurred at the beginning of the current or
comparative fiscal year would not differ significantly from the
reported results.
In December 2010, the company sold John Deere
Renewables, LLC, its wind energy business for approximately
$900 million. The company had concluded that its resources
were best invested in growing its core businesses. These assets
were reclassified as held for sale and written down to fair value
less cost to sell at October 31, 2010 (see Note 26). The asset
write-down in the fourth quarter of 2010 was $35 million
pretax and included in “Other operating expenses.” The assets
classified as held for sale after the write-down consisted of
$908 million of wind energy investments previously included in
property and equipment and $23 million of other miscellaneous
assets. At October 31, 2010, the liabilities to be sold, which
were recorded in accounts payable and accrued expenses,
totaled $35 million and the related noncontrolling interest was
$2 million.
5. SPECIAL ITEMS
Restructuring
In September 2008, the company announced it would close its
manufacturing facility in Welland, Ontario, Canada, and transfer
production to company operations in Horicon, Wisconsin, U.S.,
and Monterrey and Saltillo, Mexico. The Welland factory
manufactured utility vehicles and attachments for the agriculture
and turf business. The factory discontinued manufacturing in
the fourth quarter of 2009. The move supported ongoing
efforts aimed at improved efficiency and profitability.
The closure resulted in total expenses recognized in cost
of sales in millions of dollars as follows:
2008
Pension and other
postretirement benefits..................$
Property and equipment
impairments ..................................
Employee termination benefits............
Other expenses ..................................
Total .........................................$
2009
2010
Total
10
$ 27
$
6
$ 43
21
18
3
7
11
$ 48
1
25
25
19
$ 112
49
8
$ 15
All expenses were included in the agriculture and turf
operating segment. The pretax cash expenditures associated
with this closure through 2010 were approximately $60 million.
The expenditures in 2011 were not significant. The annual
pretax increase in earnings and cash flows due to this restructuring was approximately $40 million in 2011. Property and
equipment impairment values were based primarily on market
appraisals. The remaining liability for employee termination
benefits at October 31, 2011 was not significant.
Voluntary Employee Separations
The company combined the agricultural equipment segment
and the commercial and consumer equipment segment into the
agriculture and turf segment effective at the beginning of the
third quarter of 2009. Voluntary employee separations related
to the new organizational structure resulted in pretax expenses
of $91 million in 2009. The expenses were approximately
60 percent cost of sales and 40 percent selling, administrative
and general expenses.
Goodwill Impairment
In the fourth quarter of 2010, the company recorded a noncash charge in cost of sales for the impairment of goodwill of
$27 million pretax, or $25 million after-tax. The charge was
associated with the company’s John Deere Water reporting
unit, which is included in the agriculture and turf operating
segment. The goodwill impairment was due to a decline in the
forecasted financial performance as a result of the global
economic downturn and more complex integration activities.
In the fourth quarter of 2009, the company recorded a
non-cash charge in cost of sales for the impairment of goodwill
of $289 million pretax, or $274 million after-tax. The charge
was associated with the company’s John Deere Landscapes
reporting unit, which is included in the agriculture and turf
operating segment. The key factor contributing to the goodwill
impairment was a decline in the reporting unit’s forecasted
financial performance as a result of weak economic conditions.
The methods for determining the fair value of the
reporting units to measure the fair value of the goodwill
included a combination of discounted cash flows and
comparable market values for similar businesses (see Note 26).
6. CASH FLOW INFORMATION
For purposes of the statement of consolidated cash flows,
the company considers investments with purchased maturities
of three months or less to be cash equivalents. Substantially all
of the company’s short-term borrowings, excluding the current
maturities of long-term borrowings, mature or may require
payment within three months or less.
The equipment operations sell a significant portion of
their trade receivables to financial services. These intercompany
cash flows are eliminated in the consolidated cash flows.
All cash flows from the changes in trade accounts and
notes receivable (see Note 12) are classified as operating
activities in the statement of consolidated cash flows as these
receivables arise from sales to the company’s customers.
Cash flows from financing receivables that are related to sales
to the company’s customers (see Note 12) are also included in
operating activities. The remaining financing receivables are
related to the financing of equipment sold by independent
dealers and are included in investing activities.
The company had the following non-cash operating and
investing activities that were not included in the statement of
consolidated cash flows. The company transferred inventory
to equipment on operating leases of $449 million, $405 million
and $320 million in 2011, 2010 and 2009, respectively.
The company also had accounts payable related to purchases
of property and equipment of $135 million, $135 million and
$81 million at October 31, 2011, 2010 and 2009, respectively.
Cash payments (receipts) for interest and income taxes
consisted of the following in millions of dollars:
2011
Interest:
Equipment operations ............................
Financial services ..................................
Intercompany eliminations......................
2010
2009
$
370 $ 378 $ 388
616
679
878
(231)
(229)
(273)
Consolidated...........................................
$
755 $
Income taxes:
Equipment operations ............................
Financial services ..................................
Intercompany eliminations......................
$ 1,379 $ 639 $
336
(63)
(266)
51
Consolidated...........................................
$ 1,449 $
828
627
$ 993
170
(73)
109
$ 206
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The company has several defined benefit pension plans
covering its U.S. employees and employees in certain foreign
countries. The company has several postretirement health care
and life insurance plans for retired employees in the U.S. and
Canada. The company uses an October 31 measurement date
for these plans.
The components of net periodic pension cost and the
assumptions related to the cost consisted of the following in
millions of dollars and in percents:
2011
Pensions
Service cost ..............................................
Interest cost ..............................................
Expected return on plan assets ..................
Amortization of actuarial losses ..................
Amortization of prior service cost ...............
Early-retirement benefits............................
Settlements/curtailments ...........................
Net cost...................................................
Weighted-average assumptions
Discount rates ...........................................
Rate of compensation increase...................
Expected long-term rates of return .............
$
$
2010
2009
197 $ 176 $ 124
492
510
563
(793)
(761)
(739)
148
113
1
46
42
25
4
1
24
27
91 $
5.0%
3.9%
8.1%
104 $
5.5%
3.9%
8.3%
5
8.1%
3.9%
8.3%
31
The components of net periodic postretirement benefits
cost and the assumptions related to the cost consisted of the
following in millions of dollars and in percents:
2011
Health care and life insurance
Service cost ..............................................
Interest cost ..............................................
Expected return on plan assets ..................
Amortization of actuarial losses ..................
Amortization of prior service credit .............
Early-retirement benefits............................
Settlements/curtailments ...........................
Net cost...................................................
2010
The benefit plan obligations, funded status and the
assumptions related to the obligations at October 31 in millions
of dollars follow:
2009
$
44 $
44 $
28
326
337
344
(113)
(122)
(118)
271
311
65
(16)
(16)
(12)
1
(1)
$
512 $
Weighted-average assumptions
Discount rates ...........................................
Expected long-term rates of return .............
5.2%
7.7%
554 $
5.6%
7.8%
307
8.2%
7.8%
The above benefit plan costs in net income and other
changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
Net costs..............................
Retirement benefits
adjustments included in
other comprehensive
(income) loss:
Net actuarial losses
(gains) .....................
Prior service cost
(credit) .....................
Amortization of
actuarial losses .........
Amortization of prior
service (cost) credit...
Settlements/
curtailments..............
Total (gain) loss
recognized in other
comprehensive
(income) loss ............
Total recognized
in comprehensive
(income) loss ....................
Pensions
2011 2010 2009
Health Care
and
Life Insurance
2011 2010 2009
$ 91 $ 104 $
$ 512 $ 554 $ 307
5
Change in benefit obligations
Beginning of year balance ................ $ (10,197) $ (9,708) $ (6,467) $ (6,318)
Service cost ....................................
(197)
(176)
(44)
(44)
Interest cost ....................................
(492)
(510)
(326)
(337)
Actuarial losses ...............................
(656)
(517)
(113)
(69)
Amendments...................................
(9)
(14)
Benefits paid ...................................
648
681
340
325
Health care subsidy receipts ............
(14)
(15)
Settlements/curtailments.................
1
17
Foreign exchange and other .............
(23)
30
(28)
(9)
End of year balance ......................... (10,925) (10,197)
(6,652)
(6,467)
1,666
219
73
(325)
Change in plan assets (fair value)
Beginning of year balance ................
Actual return on plan assets.............
Employer contribution ......................
Benefits paid ...................................
Settlements.....................................
Foreign exchange and other .............
9,504
600
79
(648)
(1)
18
8,401
1,054
763
(681)
(17)
(16)
1,637
95
43
(340)
24
4
End of year balance .........................
9,552
9,504
1,459
1,637
Funded status .............................. $ (1,373) $ (693) $ (5,193) $ (4,830)
848
227
2,087
9
14
147
(148) (113)
(1)
(46)
(42)
(25)
(1)
(24)
(27)
662
62
2,181
132
(28)
2,024
(60)
(271) (311)
16
16
(65)
12
1
(123) (323)
1,912
Weighted-average assumptions
Discount rates .................................
Rate of compensation increase ........
4.4%
3.9%
5.0%
3.9%
4.4%
5.2%
The amounts recognized at October 31 in millions of
dollars consist of the following:
Pensions
___________
2011
2010
Health Care
and
Life Insurance
____________
2011
2010
Amounts recognized in
balance sheet
Noncurrent asset ............................. $
30 $ 147
Current liability ................................
(60)
(55) $ (23) $ (27)
Noncurrent liability ............................ (1,343)
(785) (5,170) (4,803)
Total ............................................... $ (1,373) $ (693) $ (5,193) $ (4,830)
$ 753 $ 166 $2,186
$ 389 $ 231 $2,219
In 2011, the company decided to participate in a prescription drug plan to provide group benefits under Medicare Part D
as an alternative to collecting the retiree drug subsidy. This
change, which will take effect in 2013, is expected to result in
future cost savings to the company greater than the Medicare
retiree drug subsidies over time. The change is included in
the health care postretirement benefit obligation in 2011.
The participants’ level of benefits will not be affected.
32
Pensions
___________
2011
2010
Health Care
and
Life Insurance
____________
2011
2010
Amounts recognized in
accumulated other comprehensive income – pretax
Net actuarial losses ......................... $ 4,473 $ 3,774 $ 2,067 $ 2,206
Prior service cost (credit) ..................
147
184
(64)
(80)
Total ............................................... $ 4,620 $ 3,958 $ 2,003 $ 2,126
The total accumulated benefit obligations for all pension
plans at October 31, 2011 and 2010 was $10,363 million and
$9,734 million, respectively.
The accumulated benefit obligations and fair value of plan
assets for pension plans with accumulated benefit obligations in
excess of plan assets were $10,168 million and $9,321 million,
respectively, at October 31, 2011 and $1,039 million and
$583 million, respectively, at October 31, 2010. The projected
benefit obligations and fair value of plan assets for pension plans
with projected benefit obligations in excess of plan assets were
$10,784 million and $9,381 million, respectively, at October 31,
2011 and $6,407 million and $5,567 million, respectively, at
October 31, 2010.
The amounts in accumulated other comprehensive income
that are expected to be amortized as net expense (income) during
fiscal 2012 in millions of dollars follow:
Pensions
Health Care
and
Life Insurance
Net actuarial losses .....................................
Prior service cost (credit) .............................
$
201
42
$
239
(15)
Total ...........................................................
$
243
$
224
The company expects to contribute approximately
$439 million to its pension plans and approximately $27 million
to its health care and life insurance plans in 2012, which include
direct benefit payments on unfunded plans.
The benefits expected to be paid from the benefit plans,
which reflect expected future years of service, and the
Medicare subsidy expected to be received are as follows in
millions of dollars:
Pensions
2012...............................
2013...............................
2014...............................
2015...............................
2016...............................
2017 to 2021..................
$ 680
677
684
680
684
3,723
Health Care
and
Life Insurance
$
360
375
391
406
418
2,244
Health Care
Subsidy
Receipts*
$
17
3
* Medicare Part D subsidy.
The annual rates of increase in the per capita cost of
covered health care benefits (the health care cost trend rates)
used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription
drug claims for pre- and post-65 age groups due to the effects
of Medicare. At October 31, 2011, the weighted-average
composite trend rates for these obligations were assumed to be
a 7.3 percent increase from 2011 to 2012, gradually decreasing
to 5.0 percent from 2017 to 2018 and all future years.
The obligations at October 31, 2010 and the cost in 2011
assumed a 7.7 percent increase from 2010 to 2011, gradually
decreasing to 5.0 percent from 2016 to 2017 and all future
years. An increase of one percentage point in the assumed
health care cost trend rate would increase the accumulated
postretirement benefit obligations by $900 million and the
aggregate of service and interest cost component of net periodic
postretirement benefits cost for the year by $55 million.
A decrease of one percentage point would decrease the obligations by $695 million and the cost by $43 million.
The discount rate assumptions used to determine the
postretirement obligations at October 31, 2011 and 2010 were
based on hypothetical AA yield curves represented by a series
of annualized individual discount rates. These discount rates
represent the rates at which the company’s benefit obligations
could effectively be settled at the October 31 measurement dates.
Fair value measurement levels in the following tables are
defined in Note 26.
The fair values of the pension plan assets by category at
October 31, 2011 follow in millions of dollars:
Total
Cash and short-term investments.......$
Equity:
U.S. equity securities......................
U.S. equity funds............................
International equity securities .........
International equity funds ...............
Fixed Income:
Government and agency securities..
Corporate debt securities................
Residential mortgage-backed and
asset-backed securities..............
Fixed income funds ........................
Real estate ........................................
Private equity/venture capital .............
Hedge funds......................................
Other investments .............................
Derivative contracts - assets*.............
Derivative contracts - liabilities** ........
Receivables, payables and other ..........
Securities lending collateral................
Securities lending liability ...................
Level 1
1,074 $
179 $
2,070
49
1,086
319
2,070
11
1,086
29
543
196
516
180
1,077
505
1,123
608
448
787
(473)
(40)
750
(750)
54
75
3
21
(15)
(40)
Level 2
Level 3
895
38
290
27
196
180
1,023
14 $ 416
1,123
462
143
448
766
(458)
750
(750)
Total net assets ..............................$ 9,552 $ 3,989 $ 3,881 $ 1,682
* Includes contracts for interest rates of $742 million, foreign currency of $19 million
and other of $26 million.
** Includes contracts for interest rates of $442 million, foreign currency of $17 million
and other of $14 million.
33
The fair values of the health care assets by category at
October 31, 2011 follow in millions of dollars:
Total
Level 1
Cash and short-term investments.......$
58 $
Equity:
U.S. equity securities......................
372
U.S. equity funds............................
84
International equity securities .........
64
International equity funds ...............
210
Fixed Income:
Government and agency securities..
250
Corporate debt securities................
39
Residential mortgage-backed and
asset-backed securities..............
22
Fixed income funds ........................
107
Real estate ........................................
57
Private equity/venture capital .............
55
Hedge funds......................................
110
Other investments .............................
22
Derivative contracts - assets*.............
12
Derivative contracts - liabilities** ........
(2)
Receivables, payables and other ..........
(1)
Securities lending collateral................
215
Securities lending liability ...................
(215)
Total net assets ..............................$ 1,459 $
7 $
Level 2
The fair values of the health care assets by category at
October 31, 2010 follow in millions of dollars:
Level 3
51
372
84
64
210
246
4
1
(1)
(1)
4
39
22
107
32 $
103
22
11
(1)
21
55
7
215
(215)
776 $
83
The fair values of the pension plan assets by category at
October 31, 2010 follow in millions of dollars:
Cash and short-term investments.......$
Equity:
U.S. equity securities......................
U.S. equity funds............................
International equity securities .........
International equity funds ...............
Fixed Income:
Government and agency securities..
Corporate debt securities................
Residential mortgage-backed and
asset-backed securities..............
Fixed income funds ........................
Real estate ........................................
Private equity/venture capital .............
Hedge funds......................................
Other investments .............................
Derivative contracts - assets*.............
Derivative contracts - liabilities** ........
Receivables, payables and other ..........
Securities lending collateral................
Securities lending liability ...................
Level 1
1,782 $
1,991
40
1,208
381
792
263
197
350
459
864
499
436
900
(588)
(70)
665
(665)
Level 2
363
1
39
87
3
30
(7)
(70)
6
36
3
329
429
262
197
311
14 $ 358
864
351
145
436
870
(581)
665
(665)
Total net assets ..............................$ 9,504 $ 4,039 $ 4,098 $ 1,367
* Includes contracts for interest rates of $820 million, foreign currency of $52 million
and other of $28 million.
** Includes contracts for interest rates of $511 million, foreign currency of $72 million
and other of $5 million.
34
Level 2
23 $
515
75
1
Level 3
123
246
255
28
43
28
74
33 $
5
20
48
8
78
24
15
(4)
2
(3)
263
(263)
873 $
688 $
76
* Includes contracts for interest rates of $12 million, foreign currency of $3 million
and other of $2 million.
** Includes contracts for foreign currency of $4 million.
A reconciliation of Level 3 pension and health care
asset fair value measurements in millions of dollars follows:
Level 3
347 $ 1,435
1,985
4
1,205
52
Level 1
Total net assets ..............................$ 1,637 $
600 $
* Includes contracts for interest rates of $10 million, foreign currency of $1 million
and other of $1 million.
** Includes contracts for foreign currency of $1 million and other of $1 million.
Total
Total
Cash and short-term investments.......$ 146 $
Equity:
U.S. equity securities......................
515
International equity securities .........
75
International equity funds ...............
247
Fixed Income:
Government and agency securities..
283
Corporate debt securities................
43
Residential mortgage-backed and
asset-backed securities..............
28
Fixed income funds ........................
74
Real estate ........................................
58
Private equity/venture capital .............
48
Hedge funds......................................
86
Other investments .............................
24
Derivative contracts - assets*.............
17
Derivative contracts - liabilities** ........
(4)
Receivables, payables and other ..........
(3)
Securities lending collateral................
263
Securities lending liability ................... (263)
Total
October 31, 2009* ......... $ 1,233
Realized gain ....................
21
Change in unrealized
gain (loss) ....................
90
Purchases, sales and
settlements - net ..........
99
October 31, 2010* ..........
Realized gain ....................
Change in unrealized
gain .............................
Purchases, sales and
settlements - net ..........
Real
Estate
$
336
16
(13)
Private Equity/
Venture
Capital
$
716
4
Hedge
Funds
$
97
181
1
6
39
95
(35)
1,443
33
378
912
32
153
1
192
48
141
3
97
October 31, 2011* .......... $ 1,765
$
11
93
437
$ 1,178
(7)
$
150
* Health care Level 3 assets represent approximately 5 percent of the reconciliation
amounts.
Fair values are determined as follows:
Cash and Short-Term Investments – Includes accounts and
cash funds that are valued based on the account value, which
approximates fair value, or on the fund’s net asset value (NAV)
based on the fair value of the underlying securities. Also included
are securities that are valued using a market approach (matrix
pricing model) in which all significant inputs are observable or
can be derived from or corroborated by observable market data.
Equity Securities and Funds – The values are determined
primarily by closing prices in the active market in which the
equity investment trades, or the fund’s NAV, based on the fair
value of the underlying securities.
Fixed Income Securities and Funds – The securities are
valued using either a market approach (matrix pricing model)
in which all significant inputs are observable or can be derived
from or corroborated by observable market data such as interest
rates, yield curves, volatilities, credit risk and prepayment speeds,
or they are valued using the closing prices in the active market
in which the fixed income investment trades. Fixed income
funds are valued using the NAV, based on the fair value of the
underlying securities.
Real Estate, Venture Capital and Private Equity –
The investments, which are structured as limited partnerships,
are valued using an income approach (estimated cash flows
discounted over the expected holding period), as well as a
market approach (the valuation of similar securities and
properties). These investments are valued at estimated fair value
based on their proportionate share of the limited partnership’s
fair value that is determined by the general partner. Real estate
investment trusts are valued at the closing prices in the active
markets in which the investment trades. Real estate investment
funds are valued at the NAV, based on the fair value of the
underlying securities.
Hedge Funds and Other Investments – The investments are
valued using the NAV provided by the administrator of the fund,
which is based on the fair value of the underlying securities.
Interest Rate, Foreign Currency and Other Derivative
Instruments – The derivatives are valued using either an income
approach (discounted cash flow) using market observable inputs,
including swap curves and both forward and spot exchange
rates, or a market approach (closing prices in the active market
in which the derivative instrument trades).
The primary investment objective for the pension plan
assets is to maximize the growth of these assets to meet the
projected obligations to the beneficiaries over a long period of
time, and to do so in a manner that is consistent with the
company’s earnings strength and risk tolerance. The primary
investment objective for the health care plan assets is to provide
the company with the financial flexibility to pay the projected
obligations to beneficiaries over a long period of time. The asset
allocation policy is the most important decision in managing
the assets and it is reviewed regularly. The asset allocation
policy considers the company’s financial strength and long-term
asset class risk/return expectations since the obligations are
long-term in nature. The current target allocations for pension
assets are approximately 37 percent for equity securities,
39 percent for debt securities, 5 percent for real estate and
19 percent for other investments. The target allocations for
health care assets are approximately 50 percent for equity
securities, 33 percent for debt securities, 3 percent for real estate
and 14 percent for other investments. The allocation percentages
above include the effects of combining derivatives with other
investments to manage asset allocations and exposures to interest
rates and foreign currency exchange. The assets are well
diversified and are managed by professional investment firms as
well as by investment professionals who are company employees.
As a result of the company’s diversified investment policy, there
were no significant concentrations of risk.
The expected long-term rate of return on plan assets
reflects management’s expectations of long-term average rates
of return on funds invested to provide for benefits included in
the projected benefit obligations. The expected return is based
on the outlook for inflation and for returns in multiple asset
classes, while also considering historical returns, asset allocation
and investment strategy. The company’s approach has emphasized the long-term nature of the return estimate such that the
return assumption is not changed unless there are fundamental
changes in capital markets that affect the company’s expectations
for returns over an extended period of time (i.e., 10 to 20 years).
The average annual return of the company’s U.S. pension fund
was approximately 7.6 percent during the past ten years and
approximately 9.6 percent during the past 20 years. Since return
premiums over inflation and total returns for major asset classes
vary widely even over ten-year periods, recent history is not
necessarily indicative of long-term future expected returns.
The company’s systematic methodology for determining the
long-term rate of return for the company’s investment strategies
supports the long-term expected return assumptions.
The company has created certain Voluntary Employees’
Beneficiary Association trusts (VEBAs) for the funding of
postretirement health care benefits. The future expected asset
returns for these VEBAs are lower than the expected return on
the other pension and health care plan assets due to investment
in a higher proportion of liquid securities. These assets are in
addition to the other postretirement health care plan assets that
have been funded under Section 401(h) of the U.S. Internal
Revenue Code and maintained in a separate account in the
company’s pension plan trust.
The company has defined contribution plans related to
employee investment and savings plans primarily in the U.S.
The company’s contributions and costs under these plans were
$108 million in 2011, $85 million in 2010 and $131 million
in 2009. The contribution rate varies primarily based on the
company’s performance in the prior year and employee
participation in the plans.
35
8. INCOME TAXES
The provision for income taxes by taxing jurisdiction and
by significant component consisted of the following in millions
of dollars:
2011
2010
2009
Current:
U.S.:
Federal ....................................................... $ 928 $ 574 $ 3
State ..........................................................
144
50
12
Foreign ...........................................................
520
363
273
Total current ...........................................
1,592
987
288
Deferred:
U.S.:
Federal .......................................................
State ..........................................................
Foreign ...........................................................
(135)
(28)
(5)
156
11
8
246
10
(84)
Total deferred .........................................
(168)
175
172
Provision for income taxes ............................. $ 1,424 $ 1,162 $ 460
Based upon location of the company’s operations, the
consolidated income before income taxes in the U.S. in 2011,
2010 and 2009 was $2,618 million, $2,048 million and $756
million, respectively, and in foreign countries was $1,605 million,
$977 million and $583 million, respectively. Certain foreign
operations are branches of Deere & Company and are, therefore, subject to U.S. as well as foreign income tax regulations.
The pretax income by location and the preceding analysis of the
income tax provision by taxing jurisdiction are, therefore, not
directly related.
A comparison of the statutory and effective income tax
provision and reasons for related differences in millions of
dollars follow:
2011
2010
2009
U.S. federal income tax provision
at a statutory rate of 35 percent ................ $ 1,478 $ 1,059 $ 469
Increase (decrease) resulting from:
Nondeductible health care claims*........................
123
Nondeductible goodwill impairment charge ...........
7
86
State and local income taxes, net of
federal income tax benefit ...............................
75
40
14
Wind energy production tax credits ......................
(30)
(26)
Research and development tax credits .................
(38)
(5)
(25)
Tax rates on foreign activities ...............................
(70)
(59)
(27)
Other-net ............................................................
(21)
27
(31)
Provision for income taxes ............................. $ 1,424 $ 1,162 $ 460
* Cumulative adjustment from change in law. Effect included in state taxes was
$7 million.
At October 31, 2011, accumulated earnings in certain
subsidiaries outside the U.S. totaled $2,597 million for which
no provision for U.S. income taxes or foreign withholding taxes
has been made, because it is expected that such earnings will be
reinvested outside the U.S. indefinitely. Determination of the
amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. At October 31, 2011, the
36
amount of cash and cash equivalents and marketable securities
held by these foreign subsidiaries was $720 million.
Deferred income taxes arise because there are certain
items that are treated differently for financial accounting than
for income tax reporting purposes. An analysis of the deferred
income tax assets and liabilities at October 31 in millions of
dollars follows:
2011
2010
______________
_______________
Deferred Deferred Deferred Deferred
Tax
Tax
Tax
Tax
Assets Liabilities Assets Liabilities
Other postretirement
benefit liabilities ....................... $ 1,944
Accrual for sales allowances .........
438
Pension liabilities - net ..................
279
Accrual for employee benefits .......
189
Inventory ......................................
152
Tax over book depreciation............
$ 492
Tax loss and tax credit
carryforwards ..........................
121
Lease transactions .......................
309
Allowance for credit losses............
115
Goodwill and other
intangible assets ......................
123
Share-based compensation ..........
113
Deferred gains on distributed
foreign earnings .......................
83
Deferred compensation.................
37
Undistributed foreign earnings.......
19
Other items ..................................
348
112
Less valuation allowances .............
(74)
Deferred income tax
assets and liabilities ............ $ 3,745
$ 1,055
$ 1,762
361
199
175
89
$ 521
141
225
137
117
101
78
35
328
(64)
$ 3,342
18
128
$1,009
Deere & Company files a consolidated federal income tax
return in the U.S., which includes the wholly-owned financial
services subsidiaries. These subsidiaries account for income taxes
generally as if they filed separate income tax returns.
At October 31, 2011, certain tax loss and tax credit
carryforwards of $121 million were available with $103 million
expiring from 2012 through 2031 and $18 million with an
unlimited expiration date.
The Patient Protection and Affordable Care Act as
amended by the Healthcare and Education Reconciliation Act
of 2010 was signed into law in the company’s second fiscal
quarter of 2010. Under the legislation, to the extent the
company’s future health care drug expenses are reimbursed
under the Medicare Part D retiree drug subsidy program,
the expenses will no longer be tax deductible effective
November 1, 2013. Since the tax effects for the retiree health
care liabilities were reflected in the company’s financial
statements, the entire impact of this tax change relating to the
future retiree drug costs was recorded in tax expense in the
second quarter of 2010, which was the period in which the
legislation was enacted. As a result of the legislation, the
company’s tax expenses increased approximately $130 million
in 2010.
A reconciliation of the total amounts of unrecognized tax
benefits at October 31 in millions of dollars follows:
2011
Beginning of year balance ....................... $
Increases to tax positions taken during
the current year .......................................
Increases to tax positions taken during
prior years...............................................
Decreases to tax positions taken during
prior years...............................................
Decreases due to lapse of statute of
limitations ...............................................
Settlements.................................................
Foreign exchange ........................................
2010
2009
218
$ 260
$ 236
23
36
29
13
83
12
(42)
(133)
(28)
(13)
(1)
1
(2)
(19)
(7)
(3)
(5)
19
218
$ 260
End of year balance ................................. $ 199
$
The amount of unrecognized tax benefits at October 31,
2011 that would affect the effective tax rate if the tax benefits
were recognized was $49 million. The remaining liability was
related to tax positions for which there are offsetting tax
receivables, or the uncertainty was only related to timing.
The company expects that any reasonably possible change in
the amounts of unrecognized tax benefits in the next twelve
months would not be significant.
The company files its tax returns according to the tax laws
of the jurisdictions in which it operates, which includes the
U.S. federal jurisdiction, and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed the
examination of the company’s federal income tax returns for
periods prior to 2009. The years 2009 and 2010 federal income
tax returns are currently under examination. Various state and
foreign income tax returns, including major tax jurisdictions in
Canada and Germany, also remain subject to examination by
taxing authorities.
The company’s policy is to recognize interest related to
income taxes in interest expense and interest income, and
recognize penalties in selling, administrative and general
expenses. During 2011, 2010 and 2009, the total amount of
expense from interest and penalties was $3 million, $3 million
and $4 million and the interest income was $3 million,
$5 million and $3 million, respectively. At October 31, 2011
and 2010, the liability for accrued interest and penalties totaled
$39 million and $41 million and the receivable for interest was
$7 million and $5 million, respectively.
9. OTHER INCOME AND OTHER OPERATING EXPENSES
The major components of other income and other operating
expenses consisted of the following in millions of dollars:
2011
Other income
Revenues from services .............................
Insurance premiums and fees earned .........
Investment income ....................................
Other ........................................................
Total .....................................................
Other operating expenses
Depreciation of equipment on
operating leases ....................................
Cost of services .........................................
Insurance claims and expenses ..................
Other ........................................................
Total .....................................................
2010
2009
$
217 $
236
11
160
276 $
198
10
122
236
182
9
87
$
624 $
606 $
514
$
306 $
115
193
102
288 $
198
146
116
288
190
167
73
$
716 $
748 $
718
The company issues insurance policies for crop insurance
and extended equipment warranties. In 2011, the crop insurance subsidiary utilized reinsurance to limit its losses and reduce
its exposure to claims. Prior to 2011, the crop insurance
business was conducted through managing general agency
agreements with external insurance companies. Although
reinsurance contracts permit recovery of certain claims from
reinsurers, the insurance subsidiary is not relieved of its primary
obligation to the policyholders. The premiums ceded by the
crop insurance subsidiary in 2011 and claims recoveries on
the ceded business were $246 million and $271 million,
respectively. These amounts from reinsurance are netted against
the insurance premiums and fees earned and the insurance
claims and expenses in the table above.
10. UNCONSOLIDATED AFFILIATED COMPANIES
Unconsolidated affiliated companies are companies in which
Deere & Company generally owns 20 percent to 50 percent
of the outstanding voting shares. Deere & Company does not
control these companies and accounts for its investments in
them on the equity basis. The investments in these companies
primarily consist of Bell Equipment Limited (32 percent
ownership), Deere-Hitachi Construction Machinery
Corporation (50 percent ownership), Xuzhou XCG
John Deere Machinery Manufacturing Co., Ltd. (50 percent
ownership) and John Deere Tiantuo Company, Ltd. (51 percent
ownership). The unconsolidated affiliated companies primarily
manufacture or market equipment. Deere & Company’s share
of the income or loss of these companies is reported in the
consolidated income statement under “Equity in income (loss)
of unconsolidated affiliates.” The investment in these companies
is reported in the consolidated balance sheet under “Investments
in unconsolidated affiliates.”
37
Combined financial information of the unconsolidated
affiliated companies in millions of dollars follows:
Operations
2011
Sales ........................................................
Net income (loss) ......................................
Deere & Company’s equity in
net income (loss) ...................................
2010
2009
$ 2,233 $ 1,502
34
23
9
11
Financial Position
Total assets .............................................................
Total external borrowings .........................................
Total net assets .......................................................
Deere & Company’s share of
the net assets .....................................................
$ 1,404
(23)
(6)
2011
2010
$ 1,357
321
495
$ 1,300
201
584
202
244
Consolidated retained earnings at October 31, 2011
include undistributed earnings of the unconsolidated affiliates
of $65 million. Dividends from unconsolidated affiliates were
$18 million in 2011, $6 million in 2010 and $.4 million in 2009.
11. MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale,
with unrealized gains and losses shown as a component of
stockholders’ equity. Realized gains or losses from the sales of
marketable securities are based on the specific identification
method.
The amortized cost and fair value of marketable securities
at October 31 in millions of dollars follow:
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
2011
U.S. government debt securities .... $ 571
Municipal debt securities ..............
34
Corporate debt securities ..............
83
Residential mortgagebacked securities* ....................
82
Marketable securities............... $ 770
2010
U.S. government debt securities .... $ 57
Municipal debt securities ..............
26
Corporate debt securities ..............
58
Residential mortgagebacked securities* ....................
69
Other debt securities ....................
2
Marketable securities............... $ 212
$
6
2
6
$
18
$
6
2
5
Fair
Value
$
1 $
576
36
89
$
1 $
787
$
63
28
63
4
$
86
4
$
1
72
2
17
$
1 $
228
* Primarily issued by U.S. government sponsored enterprises.
The contractual maturities of debt securities at October 31,
2011 in millions of dollars follow:
Amortized
Cost
38
Fair
Value
Due in one year or less ................................................. $
Due after one through five years....................................
Due after five through 10 years .....................................
Due after 10 years ........................................................
Residential mortgage-backed securities ........................
209
355
74
50
82
$
209
358
80
54
86
Debt securities .......................................................... $
770
$
787
Actual maturities may differ from contractual maturities
because some securities may be called or prepaid. Proceeds from
the sales of available-for-sale securities were $2 million in 2011,
none in 2010 and $759 million in 2009. Realized gains were
none, none and $4 million and realized losses were none,
none and $8 million in 2011, 2010 and 2009, respectively.
The increase (decrease) in net unrealized gains or losses and
unrealized losses that have been continuous for over twelve
months were not material in any years presented. Unrealized
losses at October 31, 2011 and 2010 were primarily the result of
an increase in interest rates and were not recognized in income
due to the ability and intent to hold to maturity. Losses related
to impairment write-downs were none in 2011, none in 2010
and $2 million in 2009.
12. RECEIVABLES
Trade Accounts and Notes Receivable
Trade accounts and notes receivable at October 31 consisted of
the following in millions of dollars:
2011
2010
Trade accounts and notes:
Agriculture and turf ................................................. $ 2,618
Construction and forestry.........................................
676
$ 2,929
535
Trade accounts and notes receivable–net ............. $ 3,294
$ 3,464
At October 31, 2011 and 2010, dealer notes included in
the previous table were $97 million and $852 million, and the
allowance for doubtful trade receivables was $72 million and
$71 million, respectively.
The equipment operations sell a significant portion of their
trade receivables to financial services and provide compensation
to these operations at approximate market rates of interest.
Trade accounts and notes receivable primarily arise from
sales of goods to independent dealers. Under the terms of the
sales to dealers, interest is charged to dealers on outstanding
balances, from the earlier of the date when goods are sold to
retail customers by the dealer or the expiration of certain
interest-free periods granted at the time of the sale to the dealer,
until payment is received by the company. Dealers cannot cancel
purchases after the equipment is shipped and are responsible for
payment even if the equipment is not sold to retail customers.
The interest-free periods are determined based on the type of
equipment sold and the time of year of the sale. These periods
range from one to twelve months for most equipment. Interestfree periods may not be extended. Interest charged may not be
forgiven and the past due interest rates exceed market rates.
The company evaluates and assesses dealers on an ongoing basis
as to their creditworthiness and generally retains a security
interest in the goods associated with the trade receivables.
The company is obligated to repurchase goods sold to a dealer
upon cancellation or termination of the dealer’s contract for
such causes as change in ownership and closeout of the business.
Trade accounts and notes receivable have significant
concentrations of credit risk in the agriculture and turf sector
and construction and forestry sector as shown in the previous
table. On a geographic basis, there is not a disproportionate
concentration of credit risk in any area.
Financing Receivables
Financing receivables at October 31 consisted of the following
in millions of dollars:
2011
2010
________________
________________
Unrestricted/Securitized Unrestricted/Securitized
Retail notes:
Equipment:
Agriculture and turf .......... $ 12,969
Construction and
forestry........................
1,036
Recreational products ...........
4
$ 2,597 $ 11,740 $ 1,865
362
920
5
427
2,959
12,665
2,232
2,355
2,292
14,009
3,006
2,518
Total financing receivables ....
20,859
2,959
18,583
2,292
Less:
Unearned finance income:
Equipment notes ..............
Financing leases ..............
635
121
36
590
113
27
Total ............................
756
36
703
27
Allowance for doubtful
receivables ......................
179
18
198
27
1,242
84
$ 2,905 $17,682 $ 2,238
2011
Unrestricted
Retail notes*:
Equipment:
Agriculture and turf ...................... $ 1,633
Construction and forestry .............
310
197
64
2010
Unrestricted
$
179
57
261
236
Financing receivables
related to the company’s
sales of equipment ....................... $ 5,464
$ 4,438
Financing receivable installments, including unearned
finance income, at October 31 are scheduled as follows in
millions of dollars:
2011
2010
________________
_________________
Unrestricted/Securitized Unrestricted/Securitized
1,092
239
The residual values for investments in financing leases at
October 31, 2011 and 2010 totaled $75 million and $64 million,
respectively.
Financing receivables have significant concentrations of
credit risk in the agriculture and turf sector and construction and
forestry sector as shown in the previous table. On a geographic
basis, there is not a disproportionate concentration of credit risk
in any area. The company retains as collateral a security interest
in the equipment associated with retail notes, wholesale notes
and financing leases.
Financing receivables at October 31 related to the
company’s sales of equipment that were included in the table
above consisted of the following in millions of dollars:
Total ........................................
Wholesale notes ...................................
Sales-type leases .................................
Less:
Unearned finance income:
Equipment notes .......................... $
Sales-type leases .........................
Total ........................................
Total ................................
Wholesale notes .......................
Revolving charge accounts ........
Financing leases
(direct and sales-type) ..........
Operating loans ........................
Financing
receivables – net............... $ 19,924
2011
Unrestricted
2010
Unrestricted
$ 1,492
295
1,943
3,006
776
1,787
2,232
655
Total ............................................ $ 5,725
$ 4,674
Due in months:
0 –12 .............................. $ 10,311
13 –24 ..............................
3,937
25 –36 ..............................
2,960
37 –48 ..............................
2,032
49 –60 ..............................
1,196
Thereafter ..........................
423
$ 1,192
807
524
305
119
12
$ 9,114 $ 1,043
3,538
662
2,606
391
1,821
159
1,092
35
412
2
Total ..................................... $ 20,859
$ 2,959
$18,583 $ 2,292
The maximum terms for retail notes are generally seven
years for agriculture and turf equipment and five years for
construction and forestry equipment. The maximum term for
financing leases is generally five years, while the average term
for wholesale notes is less than twelve months.
At October 31, 2011 and 2010, the unpaid balances of
receivables administered but not owned were $146 million
and $202 million, respectively. At October 31, 2011 and 2010,
worldwide financing receivables administered, which include
financing receivables administered but not owned, totaled
$22,974 million and $20,123 million, respectively.
Past due balances of financing receivables represent the
total balance held (principal plus accrued interest) with any
payment amounts 30 days or more past the contractual payment
due date. Non-performing financing receivables represent loans
for which the company has ceased accruing finance income.
These receivables are generally 120 days delinquent and the
estimated uncollectible amount, after charging the dealer’s
withholding account, has been written off to the allowance for
credit losses. Finance income for non-performing receivables is
recognized on a cash basis. Accrual of finance income is resumed
when the receivable becomes contractually current and
collections are reasonably assured.
* These retail notes generally arise from sales of equipment by company-owned dealers or through direct sales.
(continued)
39
An age analysis of past due and non-performing financing
receivables at October 31, 2011 follows in millions of dollars:
30-59
Days
Past Due
Retail Notes:
Agriculture and turf ...... $
Construction and
forestry ....................
Other:
Agriculture and turf ......
Construction and
forestry ....................
Total ............................... $
81
60-89
Days
Past Due
90 Days
or Greater
Past Due*
Total
Past Due
$
$
$
30
Total ........................ $
136
45
20
11
76
23
10
5
38
7
4
2
13
156
$
64
Total
Total
NonPast Due Performing
Retail Notes:
Agriculture and turf ...... $
Construction and
forestry ....................
Recreational products ...
Other:
Agriculture and turf ......
Construction and
forestry ....................
25
136
$
76
$
43
$
263
Current
Total
Financing
Receivables
132
$14,667
$14,935
17
1,264
4
1,357
4
38
16
5,655
5,709
13
5
1,003
1,021
170
$22,593
23,026
263
$
Less allowance for
doubtful receivables .....
Total financing
receivables - net .......
197
$22,829
* Financing receivables that are 90 days or greater past due and still accruing finance
income.
An analysis of the allowance for doubtful financing
receivables and investment in financing receivables during 2011
follow in millions of dollars:
Retail
Notes
Other
Total
Allowance
Beginning of year
balance........................ $
Provision ......................
Write-offs ....................
Recoveries ...................
144
3
(29)
12
$
44
8
(40)
28
$
37
(2)
(10)
2
$
225
9
(79)
42
End of year balance .......... $
130
$
40
$
27
$
197
$
1
Balance individually
evaluated*.................... $
1
Financing receivables
End of year balance .......... $16,296
Balance individually
evaluated*.................... $
12
* Remainder is collectively evaluated.
40
Revolving
Charge
Accounts
$ 2,518
$ 4,212
$23,026
$
$
11
23
A comparative analysis of the allowance for doubtful
financing receivables follows in millions of dollars:
2011
2010
2009
Beginning of year balance ....................... $ 225 $ 239 $ 170
Provision .....................................................
9
100
195
Write-offs....................................................
(79)
(147)
(165)
Recoveries ..................................................
42
31
25
Translation adjustments ...............................
2
14
End of year balance ................................. $ 197
$ 225
$ 239
Financing receivables are considered impaired when it is
probable the company will be unable to collect all amounts due
according to the contractual terms. Receivables reviewed for
impairment generally include those that are either past due,
or have provided bankruptcy notification, or require significant
collection efforts. Receivables that are impaired are generally
classified as non-performing.
An analysis of the impaired financing receivables at
October 31, 2011 follows in millions of dollars:
Recorded
Investment
Receivables with
specific allowance* ....... $
7
Receivables without a
specific allowance** .....
9
Unpaid
Principal
Balance
Average
Specific
Recorded
Allowance Investment
$
$
7
1
$
9
8
12
Total ............................... $
16
$
16
$
1
$
20
Agriculture and turf ...... $
11
$
11
$
1
$
14
Construction and
forestry .................... $
5
$
5
$
6
* Finance income recognized was not material.
** Primarily retail notes.
Investments in financing receivables on non-accrual
status at October 31, 2011 and 2010 were $170 million and
$225 million, respectively. Total financing receivable amounts
30 days or more past due were $263 million at October 31,
2011, compared with $359 million at October 31, 2010.
These past-due amounts represented 1.14 percent and
1.78 percent of the receivables financed at October 31, 2011
and 2010, respectively. The allowance for doubtful financing
receivables represented .86 percent and 1.12 percent of financing receivables outstanding at October 31, 2011 and 2010,
respectively. In addition, at October 31, 2011 and 2010, the
company’s financial services operations had $188 million and
$182 million, respectively, of deposits withheld from dealers
and merchants available for potential credit losses.
A troubled debt restructuring is generally the modification
of debt in which a creditor grants a concession it would not
otherwise consider to a debtor that is experiencing financial
difficulties. These modifications may include a reduction of the
stated interest rate, an extension of the maturity dates, a
reduction of the face amount or maturity amount of the debt,
or a reduction of accrued interest. During 2011, the company
identified 213 financing receivable contracts, primarily retail
notes, as troubled debt restructurings with aggregate balances
of $11 million pre-modification and $10 million post-modification. During this same period, the company’s troubled debt
restructurings that subsequently defaulted and were written off
were not material. At October 31, 2011, the company had no
commitments to lend additional funds to borrowers whose
accounts were modified in troubled debt restructurings.
Other Receivables
Other receivables at October 31 consisted of the following in
millions of dollars:
2011
2010
Taxes receivable ........................................................... $ 844
Reinsurance receivables ...............................................
242
Other ...........................................................................
245
$
746
Other receivables ...................................................... $ 1,331
$ 926
180
Reinsurance receivables are associated with the financial
services’ crop insurance subsidiary. There were no reinsurance
receivables in 2010 (see Note 9).
13. SECURITIzATION OF FINANCING RECEIVABLES
The company, as a part of its overall funding strategy,
periodically transfers certain financing receivables (retail notes)
into variable interest entities (VIEs) that are special purpose
entities (SPEs), or a non-VIE banking operation, as part of its
asset-backed securities programs (securitizations). The structure
of these transactions is such that the transfer of the retail notes
did not meet the criteria of sales of receivables, and is, therefore,
accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the
company’s consolidated statements because the assets they hold
are legally isolated. Use of the assets held by the SPEs or the
non-VIE is restricted by terms of the documents governing the
securitization transactions.
In securitizations of retail notes related to secured
borrowings, the retail notes are transferred to certain SPEs or to
a non-VIE banking operation, which in turn issue debt to
investors. The resulting secured borrowings are recorded as
“Short-term securitization borrowings” on the balance sheet.
The securitized retail notes are recorded as “Financing receivables securitized - net” on the balance sheet. The total restricted
assets on the balance sheet related to these securitizations include
the financing receivables securitized less an allowance for credit
losses, and other assets primarily representing restricted cash.
For those securitizations in which retail notes are transferred
into SPEs, the SPEs supporting the secured borrowings are
consolidated unless the company does not have both the power
to direct the activities that most significantly impact the SPEs’
economic performance and the obligation to absorb losses or
the right to receive benefits that could potentially be significant
to the SPEs. No additional support to these SPEs beyond what
was previously contractually required has been provided during
the reporting periods.
In certain securitizations, the company consolidates the
SPEs since it has both the power to direct the activities that
most significantly impact the SPEs’ economic performance
through its role as servicer of all the receivables held by the
SPEs, and the obligation through variable interests in the SPEs
to absorb losses or receive benefits that could potentially be
significant to the SPEs. The restricted assets (retail notes
securitized, allowance for credit losses and other assets) of the
consolidated SPEs totaled $1,523 million and $1,739 million
at October 31, 2011 and 2010, respectively. The liabilities
(short-term securitization borrowings and accrued interest) of
these SPEs totaled $1,395 million and $1,654 million at
October 31, 2011 and 2010, respectively. The credit holders of
these SPEs do not have legal recourse to the company’s general
credit.
In certain securitizations, the company transfers retail
notes to a non-VIE banking operation, which is not consolidated since the company does not have a controlling interest in
the entity. The company’s carrying values and interests related
to the securitizations with the unconsolidated non-VIE were
restricted assets (retail notes securitized, allowance for credit
losses and other assets) of $369 million and liabilities (short-term
securitization borrowings and accrued interest) of $346 million
at October 31, 2011.
In certain securitizations, the company transfers retail notes
into bank-sponsored, multi-seller, commercial paper conduits,
which are SPEs that are not consolidated. The company does
not service a significant portion of the conduits’ receivables, and
therefore, does not have the power to direct the activities that
most significantly impact the conduits’ economic performance.
These conduits provide a funding source to the company
(as well as other transferors into the conduit) as they fund
the retail notes through the issuance of commercial paper.
The company’s carrying values and variable interest related to
these conduits were restricted assets (retail notes securitized,
allowance for credit losses and other assets) of $1,109 million
and $589 million at October 31, 2011 and 2010, respectively.
The liabilities (short-term securitization borrowings and accrued
interest) related to these conduits were $1,038 million and
$557 million at October 31, 2011 and 2010, respectively.
The company’s carrying amount of the liabilities to the
unconsolidated conduits, compared to the maximum exposure
to loss related to these conduits, which would only be incurred
in the event of a complete loss on the restricted assets, was as
follows at October 31 in millions of dollars:
2011
Carrying value of liabilities.............................................................. $ 1,038
Maximum exposure to loss............................................................. 1,109
The total assets of unconsolidated VIEs related to securitizations were approximately $23 billion at October 31, 2011.
The components of consolidated restricted assets related to
secured borrowings in securitization transactions at October 31
were as follows in millions of dollars:
2011
2010
Financing receivables securitized (retail notes) ............... $ 2,923
Allowance for credit losses ............................................
(18)
Other assets.................................................................
96
$ 2,265
(27)
90
Total restricted securitized assets .......................... $ 3,001
$ 2,328
41
The components of consolidated secured borrowings and
other liabilities related to securitizations at October 31 were as
follows in millions of dollars:
2011
$ 2,209
2
Total liabilities related to restricted
securitized assets ................................................ $ 2,779
$ 2,211
The secured borrowings related to these restricted
securitized retail notes are obligations that are payable as the
retail notes are liquidated. Repayment of the secured borrowings
depends primarily on cash flows generated by the restricted
assets. Due to the company’s short-term credit rating, cash
collections from these restricted assets are not required to be
placed into a segregated collection account until immediately
prior to the time payment is required to the secured creditors.
At October 31, 2011, the maximum remaining term of all
securitized retail notes was approximately seven years.
14. EQUIPMENT ON OPERATING LEASES
Operating leases arise primarily from the leasing of John Deere
equipment to retail customers. Initial lease terms generally range
from four to 60 months. Net equipment on operating leases
totaled $2,150 million and $1,936 million at October 31, 2011
and 2010, respectively. The equipment is depreciated on a
straight-line basis over the terms of the lease. The accumulated
depreciation on this equipment was $478 million and
$462 million at October 31, 2011 and 2010, respectively.
The corresponding depreciation expense was $306 million in
2011, $288 million in 2010 and $288 million in 2009.
Future payments to be received on operating leases totaled
$953 million at October 31, 2011 and are scheduled in millions
of dollars as follows: 2012 – $400, 2013 – $271, 2014 – $173,
2015 – $90 and 2016 – $19.
15. INVENTORIES
Most inventories owned by Deere & Company and its
U.S. equipment subsidiaries are valued at cost, on the “last-in,
first-out” (LIFO) basis. Remaining inventories are generally
valued at the lower of cost, on the “first-in, first-out” (FIFO)
basis, or market. The value of gross inventories on the LIFO
basis represented 59 percent of worldwide gross inventories at
FIFO value at October 31, 2011 and 2010. The pretax favorable income effect from the liquidation of LIFO inventory
during 2009 was approximately $37 million. If all inventories
had been valued on a FIFO basis, estimated inventories by
major classification at October 31 in millions of dollars would
have been as follows:
42
A summary of property and equipment at October 31 in millions
of dollars follows:
2010
Short-term securitization borrowings ............................. $ 2,777
Accrued interest on borrowings .....................................
2
2011
16. PROPERTY AND DEPRECIATION
2010
Raw materials and supplies ........................................... $ 1,626
Work-in-process ...........................................................
647
Finished goods and parts .............................................. 3,584
$ 1,201
483
2,777
Total FIFO value........................................................ 5,857
Less adjustment to LIFO value....................................... 1,486
4,461
1,398
Inventories................................................................. $ 4,371
$ 3,063
Useful Lives*
(Years)
Equipment Operations
Land ..................................................
Buildings and building equipment ........
Machinery and equipment ...................
Dies, patterns, tools, etc .....................
All other .............................................
Construction in progress .....................
2011
$
24
11
7
5
117
2,430
4,254
1,213
731
649
2010
$
113
2,226
3,972
1,105
685
478
Total at cost ...................................
Less accumulated depreciation ...........
9,394
5,107
8,579
4,856
Total ..............................................
4,287
3,723
4
71
39
4
70
38
Total at cost ...................................
Less accumulated depreciation ...........
114
49
112
44
Total ..............................................
65
68
Property and equipment-net ..........
$ 4,352
$ 3,791
Financial Services
Land ..................................................
Buildings and building equipment ........
All other .............................................
27
6
* Weighted-averages
In 2010, the company signed an agreement to sell its wind
energy business and reclassified the related net property and
equipment of $908 million to assets held for sale. The property
and equipment included in financial services that was reclassified consisted of costs of machinery and equipment of $1,058
million, construction in progress of $5 million and all other
of $1 million, less accumulated depreciation of $156 million
(see Note 4).
Total property and equipment additions in 2011, 2010
and 2009 were $1,059 million, $802 million and $798 million
and depreciation was $516 million, $540 million and $513
million, respectively. Capitalized interest was $8 million,
$6 million and $15 million in the same periods, respectively.
The cost of leased property and equipment under capital leases
of $41 million and $43 million and accumulated depreciation
of $23 million and $23 million at October 31, 2011 and 2010,
respectively, is included in property and equipment.
Financial services’ property and equipment additions
included above were $2 million, none and $1 million in 2011,
2010 and 2009 and depreciation was $6 million, $64 million
and $62 million, respectively. Financial services had additions
to cost of property and equipment of $23 million in 2010 and
$71 million in 2009, which were offset by cost reductions of
$23 million in 2010 and $70 million in 2009 due to becoming
eligible for government grants for certain wind energy
investments.
Capitalized software has an estimated useful life of three
years. The amounts of total capitalized software costs, including
purchased and internally developed software, classified as
“Other Assets” at October 31, 2011 and 2010 were $592 million
and $526 million, less accumulated amortization of $451 million
and $394 million, respectively. Amortization of these software
costs was $73 million in 2011, $68 million in 2010 and $54
million in 2009. The cost of leased software assets under capital
leases amounting to $40 million and $35 million at October 31,
2011 and 2010, respectively, is included in other assets.
The cost of compliance with foreseeable environmental
requirements has been accrued and did not have a material
effect on the company’s consolidated financial statements.
17. GOODWILL AND OTHER INTANGIBLE ASSETS-NET
The changes in amounts of goodwill by operating segments
were as follows in millions of dollars:
Balance at October 31, 2009 ..............
Less accumulated
impairment losses ......................
Net balance....................................
Acquisitions........................................
Divestitures ........................................
Impairment loss* ................................
Translation adjustments ......................
Balance at October 31, 2010 ..............
Less accumulated
impairment losses ......................
Net balance....................................
Acquisitions........................................
Translation adjustments and other .......
Balance at October 31, 2011 ..............
Less accumulated
impairment losses ......................
Goodwill ...........................................
$ 698
$ 1,326
289
1,037
1
(5)
(27)
(7)
1,315
628
(5)
(27)
6
705
(13)
610
316
389
1
(5)
701
316
$ 385
316
999
1
610
$
5
615
1,316
615
316
$ 1,000
* See Note 5.
The components of other intangible assets are as follows
in millions of dollars:
Useful Lives*
(Years)
Amortized intangible assets:
Customer lists and relationships ...........
Technology, patents, trademarks
and other ........................................
2011
14
$ 109
15
2010
$
98
104
85
Total at cost ....................................
Less accumulated amortization** .........
213
90
183
70
Total ...............................................
123
113
Unamortized intangible assets:
Licenses .............................................
4
Other intangible assets-net ................
$ 127
4
$
Total short-term borrowings at October 31 consisted of the
following in millions of dollars:
Equipment Operations
Commercial paper ........................................................ $ 265
Notes payable to banks .................................................
19
Long-term borrowings due within one year ....................
244
Total
289
409
1
18. TOTAL SHORT-TERM BORROWINGS
2011
Agriculture Construction
and
and
Turf
Forestry
$ 628
Other intangible assets are stated at cost less accumulated
amortization. The amortization of other intangible assets in
2011, 2010 and 2009 was $20 million, $18 million and
$18 million, respectively. The estimated amortization expense
for the next five years is as follows in millions of dollars:
2012 - $19, 2013 - $17, 2014 - $16, 2015 – $15 and 2016 - $13.
117
* Weighted-averages
** Accumulated amortization at 2011 and 2010 for customer lists and relationships
was $54 million and $44 million and technology, patents, trademarks and other was
$36 million and $26 million, respectively.
Total ........................................................................
Financial Services
Commercial paper ........................................................
Notes payable to banks .................................................
Long-term borrowings due within one year ....................
2010
$
528
37
8
40
85
1,014
61
5,249*
1,991
36
3,214*
Total ........................................................................
6,324
5,241
Short-term borrowings .............................................
6,852
5,326
Financial Services
Short-term securitization borrowings .............................
2,777
2,209
Total short-term borrowings .................................... $ 9,629
$ 7,535
* Includes unamortized fair value adjustments related to interest rate swaps.
The notes payable related to short-term securitization
borrowings for financial services are secured by financing
receivables (retail notes) on the balance sheet (see Note 13).
Although these notes payable are classified as short-term since
payment is required if the retail notes are liquidated early, the
payment schedule for these borrowings of $2,777 million at
October 31, 2011 based on the expected liquidation of the
retail notes in millions of dollars is as follows: 2012 - $1,447,
2013 - $775, 2014 - $358, 2015 - $150, 2016 - $44 and 2017
- $3.
The weighted-average interest rates on total short-term
borrowings, excluding current maturities of long-term
borrowings, at October 31, 2011 and 2010 were 1.1 percent
and 1.0 percent, respectively.
Lines of credit available from U.S. and foreign banks were
$5,080 million at October 31, 2011. At October 31, 2011,
$3,721 million of these worldwide lines of credit were unused.
For the purpose of computing the unused credit lines, commercial paper and short-term bank borrowings, excluding
secured borrowings and the current portion of long-term
borrowings, were primarily considered to constitute utilization.
Included in the above lines of credit were long-term credit
facility agreements for $2,750 million, expiring in April 2015,
and $1,500 million, expiring in April 2013. The agreements are
mutually extendable and the annual facility fees are not significant. These credit agreements require Capital Corporation to
maintain its consolidated ratio of earnings to fixed charges at
not less than 1.05 to 1 for each fiscal quarter and the ratio of
43
senior debt, excluding securitization indebtedness, to capital
base (total subordinated debt and stockholder’s equity excluding
accumulated other comprehensive income (loss)) at not more
than 11 to 1 at the end of any fiscal quarter. The credit agreements also require the equipment operations to maintain a ratio
of total debt to total capital (total debt and stockholders’ equity
excluding accumulated other comprehensive income (loss)) of
65 percent or less at the end of each fiscal quarter. Under this
provision, the company’s excess equity capacity and retained
earnings balance free of restriction at October 31, 2011 was
$8,503 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of
$15,791 million at October 31, 2011. All of these requirements
of the credit agreements have been met during the periods
included in the consolidated financial statements.
Deere & Company has an agreement with Capital
Corporation pursuant to which it has agreed to continue to
own at least 51 percent of the voting shares of capital stock
of Capital Corporation and to maintain Capital Corporation’s
consolidated tangible net worth at not less than $50 million.
This agreement also obligates Deere & Company to make
payments to Capital Corporation such that its consolidated ratio
of earnings to fixed charges is not less than 1.05 to 1 for each
fiscal quarter. Deere & Company’s obligations to make payments
to Capital Corporation under the agreement are independent
of whether Capital Corporation is in default on its indebtedness,
obligations or other liabilities. Further, Deere & Company’s
obligations under the agreement are not measured by the
amount of Capital Corporation’s indebtedness, obligations or
other liabilities. Deere & Company’s obligations to make
payments under this agreement are expressly stated not to be a
guaranty of any specific indebtedness, obligation or liability of
Capital Corporation and are enforceable only by or in the name
of Capital Corporation. No payments were required under this
agreement during the periods included in the consolidated
financial statements.
19. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at October 31 consisted
of the following in millions of dollars:
2011
Equipment Operations
Accounts payable:
Trade payables ......................................................... $ 2,163
Dividends payable ....................................................
168
Other .......................................................................
99
Accrued expenses:
Employee benefits .................................................... 1,188
Product warranties ...................................................
662
Dealer sales discounts .............................................. 1,092
Accrued income taxes ..............................................
127
Other ....................................................................... 1,370
Total .................................................................... $ 6,869
(continued)
44
2010
$ 1,825
127
106
999
560
847
81
1,212
$ 5,757
2011
Financial Services
Accounts payable:
Deposits withheld from dealers and merchants .......... $ 188
Other .......................................................................
324
Accrued expenses:
Unearned revenue ....................................................
345
Accrued interest .......................................................
191
Employee benefits ....................................................
68
Accrued income taxes ..............................................
39
Insurance claims reserve* .........................................
186
Other .......................................................................
207
2010
$
182
270
286
190
69
73
18
165
Total ....................................................................
1,548
1,253
Eliminations** ...............................................................
612
528
Accounts payable and accrued expenses ............... $ 7,805
$ 6,482
* See Note 9.
** Primarily trade receivable valuation accounts which are reclassified as accrued
expenses by the equipment operations as a result of their trade receivables being
sold to financial services.
20. LONG-TERM BORROWINGS
Long-term borrowings at October 31 consisted of the following
in millions of dollars:
2011
2010
Equipment Operations
Notes and debentures:
6.95% notes due 2014: ($700 principal) .................. $ 736* $ 763*
4.375% notes due 2019...........................................
750
750
8-1/2% debentures due 2022 ..................................
105
105
6.55% debentures due 2028....................................
200
200
5.375% notes due 2029 ..........................................
500
500
8.10% debentures due 2030 ....................................
250
250
7.125% notes due 2031 ...........................................
300
300
Other notes ..............................................................
326
461
Total ....................................................................
Financial Services
Notes and debentures:
Medium-term notes due 2012 – 2018:
(principal $11,911 - 2011, $10,120 - 2010)
Average interest rates of 2.0% – 2011,
3.2% – 2010 .......................................................
7% notes due 2012: ($1,500 principal)
Swapped $500 to variable interest rate of
1.3% – 2010 .......................................................
5.10% debentures due 2013: ($650 principal)
Swapped $450 in 2011 and $650 in 2010
to variable interest rates of 1.1% – 2011,
1.0% – 2010 .......................................................
Other notes ..............................................................
Total ....................................................................
3,167
3,329
12,261* 10,478*
1,594*
679*
853
13,793
703*
711
13,486
Long-term borrowings**........................................... $ 16,960 $ 16,815
* Includes unamortized fair value adjustments related to interest rate swaps.
** All interest rates are as of year end.
The approximate principal amounts of the equipment
operations’ long-term borrowings maturing in each of the
next five years in millions of dollars are as follows: 2012 – $244,
2013 – $217, 2014 – $773, 2015 – $41 and 2016 – none.
The approximate principal amounts of the financial services’
long-term borrowings maturing in each of the next five years in
millions of dollars are as follows: 2012 – $5,198, 2013 – $4,736,
2014 – $2,631, 2015 – $1,266 and 2016 – $1,613.
21. LEASES
At October 31, 2011, future minimum lease payments under
capital leases amounted to $30 million as follows: 2012 – $5,
2013 – $5, 2014 – $3, 2015 – $2, 2016 – $1 and later years $14.
Total rental expense for operating leases was $175 million in
2011, $189 million in 2010 and $187 million in 2009.
At October 31, 2011, future minimum lease payments under
operating leases amounted to $435 million as follows:
2012 – $139, 2013 – $95, 2014 – $69, 2015 – $45, 2016 – $28
and later years $59.
22. COMMITMENTS AND CONTINGENCIES
The company generally determines its warranty liability by
applying historical claims rate experience to the estimated amount
of equipment that has been sold and is still under warranty based
on dealer inventories and retail sales. The historical claims rate
is primarily determined by a review of five-year claims costs and
current quality developments.
The premiums for the company’s extended warranties
are primarily recognized in income in proportion to the costs
expected to be incurred over the contract period. The unamortized extended warranty premiums (deferred revenue) included
in the following table totaled $230 million and $203 million at
October 31, 2011 and 2010, respectively.
A reconciliation of the changes in the warranty liability
and unearned premiums in millions of dollars follows:
Warranty Liability/
Unearned Premiums
_______________
2011
2010
Beginning of year balance ........................................ $ 762
Payments .....................................................................
(517)
Amortization of premiums received................................
(93)
Accruals for warranties .................................................
665
Premiums received .......................................................
120
Foreign exchange .........................................................
(45)
$ 727
(517)
(100)
568
90
(6)
End of year balance .................................................. $ 892
$ 762
At October 31, 2011, the company had commitments of
approximately $339 million for the construction and acquisition
of property and equipment. At October 31, 2011, the company
also had pledged or restricted assets of $96 million, primarily as
collateral for borrowings. In addition, see Note 13 for restricted
assets associated with borrowings related to securitizations.
The company also had other miscellaneous contingencies
totaling approximately $50 million at October 31, 2011, for
which it believes the probability for payment is substantially
remote. The accrued liability for these contingencies was not
material at October 31, 2011.
The company is subject to various unresolved legal actions
which arise in the normal course of its business, the most
prevalent of which relate to product liability (including asbestos
related liability), retail credit, software licensing, patent,
trademark and environmental matters. The company believes
the reasonably possible range of losses for these unresolved legal
actions in addition to the amounts accrued would not have a
material effect on its financial statements.
23. CAPITAL STOCK
Changes in the common stock account in millions were
as follows:
Number of
Shares Issued
Amount
Balance at October 31, 2008 ..............................
Stock options and other ......................................
536.4
$ 2,934
62
Balance at October 31, 2009 ..............................
Stock options and other ......................................
536.4
2,996
110
Balance at October 31, 2010 ..............................
Stock options and other ......................................
536.4
3,106
146
Balance at October 31, 2011 ...........................
536.4
$ 3,252
The number of common shares the company is authorized
to issue is 1,200 million. The number of authorized preferred
shares, none of which has been issued, is nine million.
The Board of Directors at its meeting in May 2008
authorized the repurchase of up to $5,000 million of additional
common stock (65.9 million shares based on the October 31,
2011 closing common stock price of $75.90 per share).
At October 31, 2011, this repurchase program had $4,074
million (53.7 million shares at the same price) remaining to
be repurchased. Repurchases of the company’s common stock
under this plan will be made from time to time, at the company’s
discretion, in the open market.
At October 31, 2011, the company had approximately
$230 million of guarantees issued primarily to banks outside the
U.S. related to third-party receivables for the retail financing of
John Deere equipment. The company may recover a portion of
any required payments incurred under these agreements from
repossession of the equipment collateralizing the receivables.
At October 31, 2011, the company had accrued losses of
approximately $7 million under these agreements. The maximum
remaining term of the receivables guaranteed at October 31, 2011
was approximately five years.
45
A reconciliation of basic and diluted net income per share
attributable to Deere & Company follows in millions, except
per share amounts:
2011
2010
2009
Net income attributable to
Deere & Company ............................... $ 2,799.9 $ 1,865.0 $ 873.5
Less income allocable to participating
securities* ...........................................
1.0
.7
Income allocable to common stock ........... $ 2,798.9 $ 1,864.3 $ 873.5
Average shares outstanding .....................
Basic per share .................................... $
417.4
6.71 $
424.0
4.40 $
422.8
2.07
Average shares outstanding .....................
Effect of dilutive stock options ..................
417.4
5.0
424.0
4.6
422.8
1.6
Total potential shares outstanding ........
422.4
428.6
424.4
Diluted per share.................................. $
6.63 $
4.35 $
2.06
* Effect in 2009 was not significant.
All stock options outstanding were included in the
computation during 2011, 2010 and 2009, except none in 2011,
1.9 million options in 2010 and 4.7 million options in 2009 that
had an antidilutive effect under the treasury stock method.
The company uses historical data to estimate option exercise
behavior and employee termination within the valuation
model. The expected term of options granted is derived from
the output of the option valuation model and represents the
period of time that options granted are expected to be outstanding. The risk-free rates utilized for periods throughout the
contractual life of the options are based on U.S. Treasury
security yields at the time of grant.
The assumptions used for the binomial lattice model to
determine the fair value of options follow:
2011
46
2009
Stock option activity at October 31, 2011 and changes
during 2011 in millions of dollars and shares follow:
Shares
24. STOCK OPTION AND RESTRICTED STOCK AWARDS
The company issues stock options and restricted stock awards
to key employees under plans approved by stockholders.
Restricted stock is also issued to nonemployee directors for
their services as directors under a plan approved by stockholders.
Options are awarded with the exercise price equal to the market
price and become exercisable in one to three years after grant.
Options expire ten years after the date of grant. Restricted stock
awards generally vest after three years. The compensation cost
for stock options, service based restricted stock units and
market/service based restricted stock units, which is based on
the fair value at the grant date, is recognized on a straight-line
basis over the requisite period the employee is required to
render service. The compensation cost for performance/service
based units, which is based on the fair value at the grant date,
is recognized over the employees’ requisite service period and
periodically adjusted for the probable number of shares to be
awarded. According to these plans at October 31, 2011, the
company is authorized to grant an additional 16.9 million shares
related to stock options or restricted stock.
The fair value of each option award was estimated on the
date of grant using a binomial lattice option valuation model.
Expected volatilities are based on implied volatilities from
traded call options on the company’s stock. The expected
volatilities are constructed from the following three components:
the starting implied volatility of short-term call options traded
within a few days of the valuation date; the predicted implied
volatility of long-term call options; and the trend in implied
volatilities over the span of the call options’ time to maturity.
2010
Risk-free interest rate ....... .08% - 3.3%
.01% - 3.6% .03% - 2.3%
Expected dividends ...........
1.9%
2.9%
1.5%
Expected volatility ............. 34.4% - 34.6% 35.3% - 47.2% 35.4% - 71.7%
Weighted-average
volatility .......................
34.4%
35.6%
36.0%
Expected term (in years) ...
6.8 - 7.8
6.6 - 7.7
6.7 - 7.8
Remaining
Contractual Aggregate
Exercise
Term
Intrinsic
Price*
(Years)
Value
Outstanding at beginning
of year ................................. 19.4
Granted..................................... 2.2
Exercised .................................. (4.6)
Expired or forfeited .................... (.1)
$ 45.12
80.61
36.99
67.45
Outstanding at end of year...... 16.9
51.70
6.14
$ 441.4
Exercisable at end of year...... 11.2
47.52
5.08
341.9
* Weighted-averages
The weighted-average grant-date fair values of options
granted during 2011, 2010 and 2009 were $25.61, $15.71 and
$13.06, respectively. The total intrinsic values of options
exercised during 2011, 2010 and 2009 were $231 million,
$139 million and $12 million, respectively. During 2011,
2010 and 2009, cash received from stock option exercises was
$170 million, $129 million and $16 million with tax benefits
of $85 million, $51 million and $4 million, respectively.
The company granted 222 thousand restricted stock units
to employees and nonemployee directors in 2011, of which
92 thousand are subject to service based only conditions, 65
thousand are subject to performance/service based conditions
and 65 thousand are subject to market/service based conditions.
The service based only units award one share of common stock
for each unit at the end of the vesting period and include
dividend equivalent payments. The performance/service based
units are subject to a performance metric based on the company’s compound annual revenue growth rate, compared to a
benchmark group of companies over the vesting period.
The market/service based units are subject to a market related
metric based on total shareholder return, compared to the same
benchmark group of companies over the vesting period.
The performance/service based units and the market/service
based units both award common stock in a range of zero to
200 percent for each unit granted based on the level of the
metric achieved and do not include dividend equivalent
payments over the vesting period. The weighted-average fair
value of the service based only units at the grant dates was
$81.90 per unit based on the market price of a share of underlying common stock. The fair value of the performance/service
based units at the grant date was $76.17 per unit based on the
market price of a share of underlying common stock excluding
dividends. The fair value of the market/service based units at
the grant date was $107.31 per unit based on a lattice valuation
model excluding dividends.
The company’s nonvested restricted shares at October 31,
2011 and changes during 2011 in millions of shares follow:
Shares
Grant-Date
Fair Value*
Service based only
Nonvested at beginning of year .............................
Granted................................................................
Vested .................................................................
.7
.1
(.2)
$ 54.62
81.90
84.68
Nonvested at end of year ......................................
.6
49.91
Performance/service and
market/service based
Granted................................................................
.1
91.74
Nonvested at end of year ......................................
.1
91.74
* Weighted-averages
During 2011, 2010 and 2009, the total share-based
compensation expense was $69 million, $71 million and
$70 million, respectively, with recognized income tax benefits
of $26 million for all years. At October 31, 2011, there was
$35 million of total unrecognized compensation cost from
share-based compensation arrangements granted under the
plans, which is related to nonvested shares. This compensation
is expected to be recognized over a weighted-average period
of approximately 2 years. The total grant date fair values of
stock options and restricted shares vested during 2011, 2010 and
2009 were $72 million, $71 million and $66 million, respectively.
The company currently uses shares that have been
repurchased through its stock repurchase programs to satisfy
share option exercises. At October 31, 2011, the company
had 130 million shares in treasury stock and 54 million shares
remaining to be repurchased under its current publicly
announced repurchase program (see Note 23).
25. OTHER COMPREHENSIVE INCOME ITEMS
Other comprehensive income items are transactions recorded in
stockholders’ equity during the year, excluding net income and
transactions with stockholders. Following are the items included
in other comprehensive income (loss) for Deere & Company
and the related tax effects in millions of dollars:
Before
Tax
Amount
2009
Retirement benefits adjustment:
Net actuarial losses and
prior service cost .............................. $ (4,198)
Reclassification of actuarial losses
and prior service cost
to net income ....................................
105
Tax
(Expense)
Credit
After
Tax
Amount
$ 1,587 $(2,611)
(31)
74
Net unrealized loss ................................
(4,093)
1,556
(2,537)
Cumulative translation adjustment ..............
326
1
327
(90)
31
(59)
84
(29)
55
(6)
2
(4)
(793)
278
(515)
805
(282)
523
12
(4)
8
Unrealized loss on derivatives:
Hedging loss .........................................
Reclassification of realized loss
to net income ....................................
Net unrealized loss ................................
Unrealized gain on investments:
Holding loss ..........................................
Reclassification of realized
loss to net income .............................
Net unrealized gain ................................
Total other comprehensive income (loss) .... $ (3,761)
$ 1,555 $ (2,206)
2010
Retirement benefits adjustment:
Net actuarial losses and
prior service cost .............................. $ (213)
Reclassification of actuarial losses
and prior service cost
to net income ....................................
474
$
77
$ (136)
(180)
294
Net unrealized gain ................................
261
(103)
158
Cumulative translation adjustment ..............
49
(13)
36
(56)
19
(37)
Unrealized loss on derivatives:
Hedging loss .........................................
Reclassification of realized loss
to net income ....................................
79
(27)
52
Net unrealized gain ................................
23
(8)
15
Unrealized holding gain and net
unrealized gain on investments ..............
8
(3)
5
Total other comprehensive income (loss) .... $ 341
$ (127)
$
214
(continued)
47
Before
Tax
Amount
2011
Retirement benefits adjustment:
Net actuarial losses and
prior service cost .............................. $ (989)
Reclassification of actuarial losses
and prior service cost
to net income ....................................
450
Tax
(Expense)
Credit
$ 368
After
Tax
Amount
$ (621)
(167)
283
Net unrealized loss ................................
(539)
201
(338)
Cumulative translation adjustment ..............
14
4
18
31
(11)
20
Unrealized gain on derivatives:
Hedging gain .........................................
Reclassification of realized loss
to net income ....................................
1
1
Net unrealized gain ................................
32
(11)
21
Unrealized holding gain and net
unrealized gain on investments ..............
2
(1)
1
Total other comprehensive income (loss) .... $ (491)
$ 193
$ (298)
26. FAIR VALUE MEASUREMENTS
The fair values of financial instruments that do not approximate
the carrying values at October 31 in millions of dollars follow:
2011
2010
______________
______________
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Financing receivables ...................... $ 19,924 $ 19,919 $ 17,682 $ 17,759
Financing receivables securitized ..... $ 2,905 $ 2,907 $ 2,238 $ 2,257
Short-term securitization
borrowings .................................. $ 2,777 $ 2,789 $ 2,209 $ 2,229
Long-term borrowings due
within one year:
Equipment operations.............. $ 244 $ 233 $
40 $
42
Financial services.................... 5,249
5,331
3,214 3,267
Total ....................................... $ 5,493 $ 5,564 $ 3,254 $ 3,309
Long-term borrowings:
Equipment operations .................. $ 3,167 $ 3,771 $ 3,329 $ 3,745
Financial services ........................ 13,793 14,154 13,486 14,048
Total ....................................... $ 16,960 $ 17,925 $ 16,815 $ 17,793
Fair values of the long-term financing receivables were
based on the discounted values of their related cash flows at
current market interest rates. The fair values of the remaining
financing receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term
securitization borrowings were based on current market quotes
for identical or similar borrowings and credit risk, or on the
discounted values of their related cash flows at current market
interest rates. Certain long-term borrowings have been swapped
to current variable interest rates. The carrying values of these
long-term borrowings included adjustments related to fair value
hedges.
48
Assets and liabilities measured at October 31 at fair value
on a recurring basis in millions of dollars follow:
2011*
2010*
Marketable securities
U.S. government debt securities ............................. $ 576
Municipal debt securities ........................................
36
Corporate debt securities........................................
89
Residential mortgage-backed
securities** ........................................................
86
Other debt securities ..............................................
Total marketable securities .........................................
Other assets
Derivatives:
Interest rate contracts ............................................
Foreign exchange contracts ....................................
Cross-currency interest rate contracts.....................
$ 63
28
63
72
2
787
228
471
12
2
493
24
3
Total assets*** ............................................................... $ 1,272
$ 748
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts ............................................ $ 61
Foreign exchange contracts ....................................
100
Cross-currency interest rate contracts.....................
7
$ 38
23
48
Total liabilities ................................................................. $ 168
$ 109
*
All measurements above were Level 2 measurements except for Level 1 measurements of U.S. government debt securities of $540 million and $36 million at
October 31, 2011 and 2010, respectively.
** Primarily issued by U.S. government sponsored enterprises.
*** Excluded from this table are the company’s cash and cash equivalents, which are
carried at cost that approximates fair value. The cash and cash equivalents consist
primarily of money market funds.
Fair value, nonrecurring, Level 3 measurements at
October 31 in millions of dollars follow:
Fair Value*
_____________
2011
2010
Financing receivables**.... $
Losses
____________________
2011
2010
2009
5 $
21
$
5 $
21
Goodwill ..........................
$
34
$
27 $ 289
Property and equipment
held for sale***............
$
918
$
35
* Does not include cost to sell.
** Primarily wholesale notes and operating loans.
*** See Note 4.
Level 1 measurements consist of quoted prices in active
markets for identical assets or liabilities. Level 2 measurements
include significant other observable inputs such as quoted prices
for similar assets or liabilities in active markets; identical assets or
liabilities in inactive markets; observable inputs such as interest
rates and yield curves; and other market-corroborated inputs.
Level 3 measurements include significant unobservable inputs.
Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
In determining fair value, the company uses various methods
including market and income approaches. The company utilizes
valuation models and techniques that maximize the use of
observable inputs. The models are industry-standard models that
consider various assumptions including time values and yield
curves as well as other economic measures. These valuation
techniques are consistently applied.
The following is a description of the valuation
methodologies the company uses to measure financial
instruments and nonmonetary assets at fair value:
Marketable Securities – The portfolio of investments is
primarily valued on a market approach (matrix pricing model)
in which all significant inputs are observable or can be derived
from or corroborated by observable market data such as interest
rates, yield curves, volatilities, credit risk and prepayment speeds.
Derivatives – The company’s derivative financial
instruments consist of interest rate swaps and caps, foreign
currency forwards and swaps and cross-currency interest rate
swaps. The portfolio is valued based on an income approach
(discounted cash flow) using market observable inputs,
including swap curves and both forward and spot exchange
rates for currencies.
Financing Receivables – Specific reserve impairments are
based on the fair value of the collateral, which is measured using
an income approach (discounted cash flow) or a market
approach (appraisal values or realizable values). Inputs include
interest rates and selection of realizable values.
Goodwill – The impairment of goodwill is based on the
implied fair value measured as the difference between the fair
value of the reporting unit and the fair value of the unit’s
identifiable net assets. An estimate of the fair value of the
reporting unit is determined through a combination of an
income approach (discounted cash flows) and market values for
similar businesses, which includes inputs such as interest rates
and selections of similar businesses.
Property and Equipment Held for Sale – The impairment
of long-lived assets held for sale is measured at the lower of
the carrying amount, or fair value less cost to sell. Fair value is
based on the probable sale price. The inputs include estimates
of final sale price adjustments.
27. DERIVATIVE INSTRUMENTS
Certain of the company’s derivative agreements contain credit
support provisions that require the company to post collateral
based on reductions in credit ratings. The aggregate fair value of
all derivatives with credit-risk-related contingent features that
were in a liability position at October 31, 2011 and 2010 was
$23 million and $16 million, respectively. The company, due to
its credit rating, has not posted any collateral. If the credit-riskrelated contingent features were triggered, the company would
be required to post full collateral for this liability position, prior
to considering applicable netting provisions.
Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The company
manages individual counterparty exposure by setting limits that
consider the credit rating of the counterparty and the size of
other financial commitments and exposures between the
company and the counterparty banks. All interest rate derivatives
are transacted under International Swaps and Derivatives
Association (ISDA) documentation. Some of these agreements
include collateral support arrangements. Each master agreement
permits the net settlement of amounts owed in the event of
early termination. The maximum amount of loss that the
company would incur if counterparties to derivative instruments
fail to meet their obligations, not considering collateral received
or netting arrangements, was $485 million and $520 million as
of October 31, 2011 and 2010, respectively. The amount of
collateral received at October 31, 2011 and 2010 to offset this
potential maximum loss was $25 million and $85 million,
respectively. The netting provisions of the agreements would
reduce the maximum amount of loss the company would incur
if the counterparties to derivative instruments fail to meet their
obligations by an additional $59 million and $58 million as of
October 31, 2011 and 2010, respectively. None of the concentrations of risk with any individual counterparty was considered
significant at October 31, 2011 and 2010.
Cash Flow Hedges
Certain interest rate and cross-currency interest rate contracts
(swaps) were designated as hedges of future cash flows from
borrowings. The total notional amounts of the receive-variable/
pay-fixed interest rate contracts at October 31, 2011 and 2010
were $1,350 million and $1,060 million, respectively. The total
notional amounts of the cross-currency interest rate contracts
were $853 million and $849 million at October 31, 2011 and
2010, respectively. The effective portions of the fair value gains
or losses on these cash flow hedges were recorded in other
comprehensive income (OCI) and subsequently reclassified into
interest expense or other operating expenses (foreign exchange)
in the same periods during which the hedged transactions
affected earnings. These amounts offset the effects of interest
rate or foreign currency exchange rate changes on the related
borrowings. Any ineffective portions of the gains or losses on all
cash flow interest rate contracts designated as cash flow hedges
were recognized currently in interest expense or other operating expenses (foreign exchange) and were not material during
any years presented. The cash flows from these contracts were
recorded in operating activities in the statement of consolidated
cash flows.
The amount of loss recorded in OCI at October 31, 2011
that is expected to be reclassified to interest expense or other
operating expenses in the next twelve months if interest rates or
exchange rates remain unchanged is approximately $4 million
after-tax. These contracts mature in up to 35 months. There were
no gains or losses reclassified from OCI to earnings based on
the probability that the original forecasted transaction would
not occur.
49
Fair Value Hedges
Certain interest rate contracts (swaps) were designated as fair
value hedges of borrowings. The total notional amounts of the
receive-fixed/pay-variable interest rate contracts at October 31,
2011 and 2010 were $7,730 million and $6,640 million,
respectively. The effective portions of the fair value gains or
losses on these contracts were offset by fair value gains or losses
on the hedged items (fixed-rate borrowings). Any ineffective
portions of the gains or losses were recognized currently in
interest expense. The ineffective portions were a loss of
$5 million in 2011 and a gain of $1 million in 2010. The cash
flows from these contracts were recorded in operating activities
in the statement of consolidated cash flows.
The gains (losses) on these contracts and the underlying
borrowings recorded in interest expense follow in millions of
dollars:
2011
Interest rate contracts* ...........................................
Borrowings** ..........................................................
$
16
(21)
2010
$ 150
(149)
* Includes changes in fair values of interest rate contracts excluding net accrued
interest income of $172 million and $222 million during 2011 and 2010, respectively.
** Includes adjustments for fair values of hedged borrowings excluding accrued interest
expense of $277 million and $336 million during 2011 and 2010, respectively.
Derivatives Not Designated as Hedging Instruments
The company has certain interest rate contracts (swaps and
caps), foreign exchange contracts (forwards and swaps) and
cross-currency interest rate contracts (swaps), which were not
formally designated as hedges. These derivatives were held as
economic hedges for underlying interest rate or foreign
currency exposures primarily for certain borrowings and
purchases or sales of inventory. The total notional amounts of
the interest rate swaps at October 31, 2011 and 2010 were
$3,216 million and $2,702 million, the foreign exchange
contracts were $3,058 million and $2,777 million and the
cross-currency interest rate contracts were $52 million and
$60 million, respectively. At October 31, 2011 and 2010, there
were also $1,402 million and $1,055 million, respectively, of
interest rate caps purchased and the same amounts sold at the
same capped interest rate to facilitate borrowings through
securitization of retail notes. The fair value gains or losses from
the interest rate contracts were recognized currently in interest
expense and the gains or losses from foreign exchange contracts
in cost of sales or other operating expenses, generally offsetting
over time the expenses on the exposures being hedged.
The cash flows from these non-designated contracts were
recorded in operating activities in the statement of consolidated
cash flows.
Fair values of derivative instruments in the consolidated
balance sheet at October 31 in millions of dollars follow:
2011
Other Assets
Designated as hedging instruments:
Interest rate contracts ............................................. $
Not designated as hedging instruments:
Interest rate contracts .............................................
Foreign exchange contracts ....................................
Cross-currency interest rate contracts .....................
2010
404
$
67
12
2
457
36
24
3
Total not designated ...........................................
81
Total derivatives...................................................... $
485
$
520
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts ............................................. $
Cross-currency interest rate contracts .....................
13
7
$
18
47
Total designated .................................................
Not designated as hedging instruments:
Interest rate contracts .............................................
Foreign exchange contracts ....................................
Cross-currency interest rate contracts .....................
63
20
65
48
100
20
23
1
Total not designated ...........................................
148
44
Total derivatives...................................................... $
168
$
109
The classification and gains (losses) including accrued
interest expense related to derivative instruments on the
statement of consolidated income consisted of the following in
millions of dollars:
2011
2010
2009
$ 372
$ 453
(5)
(14)
(90)
36
(42)
Reclassified from OCI
(Effective Portion):
Interest rate contracts – Interest expense* ....
Foreign exchange contracts –
Other expense* .......................................
(20)
(68)
19
(11)
Recognized Directly in Income
(Ineffective Portion):
Interest rate contracts – Interest expense* ....
Foreign exchange contracts –
Other expense* .......................................
**
**
**
**
**
**
(1)
25
(5)
(51)
(19)
(64)
(127)
(92)
(90)
Total not designated ................................ $ (179)
$ (86)
$ (159)
Fair Value Hedges
Interest rate contracts – Interest expense ..... $ 188
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts – OCI (pretax)* ..........
Foreign exchange contracts –
OCI (pretax)* ...........................................
Not Designated as Hedges
Interest rate contracts – Interest expense* ....
Foreign exchange contracts –
Cost of sales ...........................................
Foreign exchange contracts –
Other expense* .......................................
(84)
* Includes interest and foreign exchange gains (losses) from cross-currency interest
rate contracts.
** The amount is not significant.
50
28. SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS
ENDED OCTOBER 31, 2011, 2010 AND 2009
At the beginning of fiscal year 2011, the company combined
the reporting of the credit segment and the “Other” segment
into the financial services segment. The “Other” segment
consisted of an insurance business related to extended warranty
policies that did not meet the materiality threshold of reporting.
The segment information for previous periods was revised
accordingly.
The company’s operations are presently organized and
reported in three major business segments described as follows:
The agriculture and turf segment primarily manufactures
and distributes a full line of farm and turf equipment and related
service parts – including large, medium and utility tractors;
loaders; combines, corn pickers, cotton and sugarcane harvesters
and related front-end equipment and sugarcane loaders; tillage,
seeding and application equipment, including sprayers, nutrient
management and soil preparation machinery; hay and forage
equipment, including self-propelled forage harvesters and
attachments, balers and mowers; turf and utility equipment,
including riding lawn equipment and walk-behind mowers,
golf course equipment, utility vehicles, and commercial
mowing equipment, along with a broad line of associated
implements; integrated agricultural management systems
technology; precision agricultural irrigation equipment and
supplies; landscape and nursery products; and other outdoor
power products.
The construction and forestry segment primarily manufactures and distributes a broad range of machines and service parts
used in construction, earthmoving, material handling and
timber harvesting – including backhoe loaders; crawler dozers
and loaders; four-wheel-drive loaders; excavators; motor
graders; articulated dump trucks; landscape loaders; skid-steer
loaders; and log skidders, feller bunchers, log loaders, log
forwarders, log harvesters and related attachments.
The products and services produced by the segments
above are marketed primarily through independent retail dealer
networks and major retail outlets.
The financial services segment primarily finances sales
and leases by John Deere dealers of new and used agriculture
and turf equipment and construction and forestry equipment.
In addition, the financial services segment provides wholesale
financing to dealers of the foregoing equipment, provides
operating loans, finances retail revolving charge accounts and
offers crop risk mitigation products and extended equipment
warranties.
Because of integrated manufacturing operations and
common administrative and marketing support, a substantial
number of allocations must be made to determine operating
segment and geographic area data. Intersegment sales and
revenues represent sales of components and finance charges,
which are generally based on market prices.
Information relating to operations by operating segment
in millions of dollars follows. In addition to the following
unaffiliated sales and revenues by segment, intersegment sales
and revenues in 2011, 2010 and 2009 were as follows:
agriculture and turf net sales of $98 million, $59 million and
$32 million, construction and forestry net sales of $3 million,
$7 million and $4 million, and financial services revenues of
$210 million, $224 million and $255 million, respectively.
OPERATING SEGMENTS
2011
2010
2009
Net sales and revenues
Unaffiliated customers:
Agriculture and turf net sales ................. $ 24,094 $ 19,868 $ 18,122
Construction and forestry
net sales ...........................................
5,372
3,705
2,634
Total net sales ...................................
Financial services revenues........................
Other revenues* ........................................
29,466
2,163
384
23,573
2,074
358
20,756
2,028
328
Total ........................................................ $ 32,013 $ 26,005 $ 23,112
* Other revenues are primarily the equipment operations’ revenues for finance
and interest income, and other income as disclosed in Note 31, net of certain
intercompany eliminations.
Operating profit (loss)
Agriculture and turf.................................... $ 3,447 $ 2,790 $ 1,448
Construction and forestry ...........................
392
119
(83)
Financial services* .....................................
725
499
242
Total operating profit..............................
4,564
3,408
1,607
Interest income..........................................
Interest expense ........................................
Foreign exchange losses from equipment
operations’ financing activities ...............
Corporate expenses – net ..........................
Income taxes .............................................
47
(191)
42
(184)
46
(163)
(11)
(177)
(1,424)
(30)
(200)
(1,162)
(40)
(117)
(460)
Total .....................................................
(1,756)
(1,534)
(734)
Net income................................................
Less: Net income attributable to
noncontrolling interests..........................
2,808
1,874
873
8
9
Net income attributable to
Deere & Company ................................. $ 2,800 $ 1,865 $
873
* Operating profit of the financial services business segment includes the effect of its
interest expense and foreign exchange gains or losses.
(continued)
51
OPERATING SEGMENTS
2011
2010
2009
Interest income*
Agriculture and turf.................................... $
23 $
20 $
28
Construction and forestry ...........................
3
3
4
Financial services ......................................
1,581
1,528
1,584
Corporate ..................................................
47
42
46
Intercompany ............................................
(231)
(229)
(273)
Total ..................................................... $ 1,423 $ 1,364 $ 1,389
* Does not include finance rental income for equipment on operating leases.
Interest expense
Agriculture and turf.................................... $
Construction and forestry ...........................
Financial services ......................................
Corporate ..................................................
Intercompany ............................................
152 $
26
621
191
(231)
Total ..................................................... $
759 $
165 $
21
670
184
(229)
208
19
925
163
(273)
811 $ 1,042
GEOGRAPHIC AREAS
2011
2010
2009
Net sales and revenues
Unaffiliated customers:
U.S. and Canada:
Equipment operations
net sales (88%)* ........................... $ 17,357 $ 14,794 $ 13,022
Financial services revenues (81%)*.... 1,857
1,817
1,801
Total .............................................
19,214
16,611
14,823
Outside U.S. and Canada:
Equipment operations net sales .........
Financial services revenues ...............
12,109
306
8,779
257
7,734
227
Total .............................................
12,415
9,036
7,961
Other revenues ..........................................
384
358
328
Depreciation* and amortization
expense
Agriculture and turf.................................... $
Construction and forestry ...........................
Financial services ......................................
505 $
82
328
470 $
79
366
438
78
357
Total ......................................................... $ 32,013 $ 26,005 $ 23,112
Total ..................................................... $
915 $
915 $
873
Operating profit
U.S. and Canada:
Equipment operations ........................ $ 2,898 $ 2,302 $ 1,129
Financial services ..............................
593
400
156
* Includes depreciation for equipment on operating leases.
Equity in income (loss) of
unconsolidated affiliates
Agriculture and turf.................................... $
Construction and forestry ...........................
Financial services ......................................
5 $
3
1
13 $
(3)
1
14
(21)
1
Total ..................................................... $
9 $
11 $
(6)
Identifiable operating assets
Agriculture and turf.................................... $ 9,178 $ 7,593 $ 6,526
Construction and forestry ...........................
2,915
2,353
2,132
Financial services ...................................... 29,795 27,507 25,964
Corporate* ................................................
6,319
5,814
6,511
Total ..................................................... $ 48,207 $ 43,267 $ 41,133
* Corporate assets are primarily the equipment operations’ retirement benefits,
deferred income tax assets, marketable securities and cash and cash equivalents
as disclosed in Note 31, net of certain intercompany eliminations.
Capital additions
Agriculture and turf.................................... $
Construction and forestry ...........................
Financial services ......................................
52
The company views and has historically disclosed its
operations as consisting of two geographic areas, the U.S. and
Canada, and outside the U.S. and Canada, shown below in
millions of dollars. No individual foreign country’s net sales
and revenues were material for disclosure purposes.
909 $
148
2
729 $
73
702
95
1
Total ..................................................... $ 1,059 $
802 $
798
Investments in unconsolidated affiliates
Agriculture and turf.................................... $
Construction and forestry ...........................
Financial services ......................................
35 $
159
8
66 $
172
7
57
149
7
Total ..................................................... $
202 $
245 $
213
* The percentages indicate the approximate proportion of each amount that relates to
the U.S. only and are based upon a three-year average for 2011, 2010 and 2009.
Total .............................................
3,491
2,702
1,285
Outside U.S. and Canada:
Equipment operations ........................
Financial services ..............................
941
132
607
99
236
86
Total .............................................
1,073
706
322
Total ......................................................... $ 4,564 $ 3,408 $ 1,607
Property and equipment
U.S. .......................................................... $ 2,329 $ 2,035 $ 2,907
Germany ...................................................
572
489
442
Other countries..........................................
1,451
1,267
1,183
Total ................................................. $ 4,352 $ 3,791 $ 4,532
29. SUPPLEMENTAL INFORMATION (UNAUDITED)
30. SUBSEQUENT EVENTS
Common stock per share sales prices from New York Stock
Exchange composite transactions quotations follow:
A quarterly dividend of $.41 per share was declared at the
Board of Directors meeting on December 7, 2011, payable on
February 1, 2012 to stockholders of record on December 30,
2011.
In November 2011, the company’s financial services
operations issued $600 million of 1.25% medium-term notes
due in December 2014 and $500 million of 2.00% mediumterm notes due in January 2017. The $500 million of 2.00%
medium-term notes were swapped to a variable interest rate
of 1.18% at the issuance date.
First
Quarter
2011 Market price
High ...........................................
Low ...........................................
2010 Market price
High ...........................................
Low ...........................................
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 90.99 $ 99.24 $ 97.39 $ 80.82
$ 74.70 $ 86.91 $ 78.51 $ 61.72
$ 59.95 $ 62.21 $ 66.68 $ 77.25
$ 46.30 $ 48.96 $ 54.50 $ 62.34
At October 31, 2011, there were 26,680 holders of record
of the company’s $1 par value common stock.
Quarterly information with respect to net sales and
revenues and earnings is shown in the following schedule.
The company’s fiscal year ends in October and its interim periods
(quarters) end in January, April and July. Such information is
shown in millions of dollars except for per share amounts.
First
Second
Quarter Quarter
Third
Fourth
Quarter Quarter
2011*
Net sales and revenues .................... $ 6,119 $ 8,910 $ 8,372 $ 8,612
Net sales ......................................... 5,514 8,327
7,722 7,903
Gross profit ..................................... 1,420 2,221
1,929 1,977
Income before income taxes.............
746
1,341
1,079 1,057
Net income attributable
to Deere & Company....................
514
904
712
670
Per share data:
Basic ..........................................
1.22
2.15
1.71
1.63
Diluted ........................................
1.20
2.12
1.69
1.62
Dividends declared ......................
.35
.35
.41
.41
Dividends paid.............................
.30
.35
.35
.41
2010*
Net sales and revenues .................... $ 4,835 $ 7,131 $ 6,837 $ 7,202
Net sales ......................................... 4,237 6,548 6,224 6,564
Gross profit ..................................... 1,032
1,783
1,704 1,655
Income before income taxes.............
364
989
922
750
Net income attributable
to Deere & Company....................
243
548
617
457
Per share data:
Basic ..........................................
.57
1.29
1.45
1.08
Diluted ........................................
.57
1.28
1.44
1.07
Dividends declared ......................
.28
.28
.30
.30
Dividends paid.............................
.28
.28
.28
.30
Net income per share for each quarter must be computed independently. As a result,
their sum may not equal the total net income per share for the year.
* See Note 5 for “Special Items” and Note 4 for “Acquisitions and Dispositions.”
53
31. SUPPLEMENTAL CONSOLIDATING DATA
INCOME STATEMENT
For the Years Ended October 31, 2011, 2010 and 2009
(In millions of dollars)
EQUIPMENT OPERATIONS*
2011
2010
2009
2011
FINANCIAL SERVICES
2010
2009
Net Sales and Revenues
Net sales ...................................................................................
Finance and interest income ......................................................
Other income ............................................................................
$ 29,466.1
73.3
455.5
$ 23,573.2
64.8
386.2
$ 20,756.1
77.7
337.1
Total ....................................................................................
29,994.9
24,024.2
21,170.9
2,373.3
2,297.6
2,283.3
Costs and Expenses
Cost of sales .............................................................................
Research and development expenses .........................................
Selling, administrative and general expenses ..............................
Interest expense ........................................................................
Interest compensation to Financial Services ................................
Other operating expenses ..........................................................
21,920.7
1,226.2
2,786.6
191.4
178.5
192.5
17,400.3
1,052.4
2,496.0
184.1
186.3
177.9
16,256.9
977.0
2,262.4
162.6
227.9
186.5
394.4
621.0
482.9
670.1
528.3
924.8
634.2
646.7
588.7
Total ....................................................................................
26,495.9
21,497.0
20,073.3
1,649.6
1,799.7
2,041.8
Income of Consolidated Group before
Income Taxes .....................................................................
Provision for income taxes .........................................................
3,499.0
1,169.6
2,527.2
1,035.2
1,097.6
420.3
723.7
253.9
497.9
126.4
241.5
39.7
Income of Consolidated Group..............................................
2,329.4
1,492.0
677.3
469.8
371.5
201.8
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Financial Services .................................................................
Other ....................................................................................
471.0
7.4
372.5
9.9
202.5
(6.7)
1.2
.9
.5
Total .................................................................................
478.4
382.4
195.8
1.2
.9
.5
Net Income .............................................................................
2,807.8
1,874.4
873.1
471.0
372.4
202.3
Less: Net income (loss) attributable
to noncontrolling interests ......................................................
7.9
9.4
(.1)
(.2)
Net Income Attributable to Deere & Company .....................
$ 2,799.9
$ 1,865.0
$
2,080.8 $ 1,975.1
292.5
322.5
(.4)
$
873.5
$
471.0
$
372.5
$ 2,037.3
246.0
$
202.5
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. The “Equipment Operations” reflect the basis of consolidation described in Note 1
to the consolidated financial statements. The consolidated group data in the “Equipment Operations” income statement reflect the results of the agriculture and
turf operations and construction and forestry operations. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to
arrive at the consolidated financial statements.
54
31. SUPPLEMENTAL CONSOLIDATING DATA (continued)
BALANCE SHEET
As of October 31, 2011 and 2010
(In millions of dollars except per share amounts)
ASSETS
Cash and cash equivalents....................................................................................
Marketable securities ...........................................................................................
Receivables from unconsolidated subsidiaries and affiliates....................................
Trade accounts and notes receivable - net .............................................................
Financing receivables - net ...................................................................................
Financing receivables securitized - net ..................................................................
Other receivables .................................................................................................
Equipment on operating leases - net .....................................................................
Inventories ...........................................................................................................
Property and equipment - net ...............................................................................
Investments in unconsolidated subsidiaries and affiliates ........................................
Goodwill ...............................................................................................................
Other intangible assets - net .................................................................................
Retirement benefits ..............................................................................................
Deferred income taxes ..........................................................................................
Other assets.........................................................................................................
Assets held for sale ..............................................................................................
Total Assets .......................................................................................................
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Short-term borrowings ..........................................................................................
Short-term securitization borrowings .....................................................................
Payables to unconsolidated subsidiaries and affiliates ............................................
Accounts payable and accrued expenses...............................................................
Deferred income taxes ..........................................................................................
Long-term borrowings ..........................................................................................
Retirement benefits and other liabilities .................................................................
Total liabilities ..........................................................................................
EQUIPMENT OPERATIONS*
2011
2010
_________
_________
FINANCIAL SERVICES
2011
2010
_________
_________
$
$
3,187.5
502.6
1,713.4
1,093.9
14.0
$ 3,348.3
965.6
889.5
4,370.6
4,287.5
3,473.9
999.8
123.4
29.6
3,052.8
468.6
3,063.0
3,722.4
3,420.2
998.6
113.0
145.8
2,737.1
381.2
$ 24,283.2
$ 21,540.9
$
$
528.5
1,712.6
999.8
9.4
85.0
459.7
284.7
$
2,807.2
19,909.5
2,905.0
370.1
2,150.0
442.3
227.9
1.6
2,979.7
17,672.8
2,238.3
49.4
1,936.2
64.9
8.1
68.3
7.0
4.0
28.0
91.2
712.6
$ 29,795.0
4.0
31.4
103.2
812.9
931.4
$ 27,506.4
$ 5,240.7
2,208.8
1,673.7
1,253.3
415.5
13,485.9
43.8
24,321.7
117.7
6,869.3
99.0
3,167.1
6,686.7
17,468.3
205.2
5,757.1
92.0
3,328.6
5,771.6
15,239.5
$ 6,323.8
2,777.4
1,665.5
1,547.8
354.7
13,792.8
52.6
26,514.6
3,251.7
3,106.3
1,570.6
1,722.5
(7,292.8)
14,519.4
(5,789.5)
12,353.1
1,541.5
1,335.2
(4,135.4)
453.8
(8.3)
11.9
(3,678.0)
6,800.3
14.6
6,814.9
(3,797.0)
436.0
(29.2)
10.6
(3,379.6)
6,290.3
11.1
6,301.4
164.7
(8.3)
11.9
168.3
3,280.4
3,280.4
143.6
(29.2)
10.6
125.0
3,182.7
2.0
3,184.7
$ 24,283.2
$ 21,540.9
$ 29,795.0
$ 27,506.4
Commitments and contingencies (Note 22)
STOCKHOLDERS’ EQUITY
Common stock, $1 par value (authorized – 1,200,000,000 shares;
issued – 536,431,204 shares in 2011 and 2010), at paid-in amount.................
Common stock in treasury, 130,361,345 shares in 2011
and 114,250,815 shares in 2010, at cost..........................................................
Retained earnings.................................................................................................
Accumulated other comprehensive income (loss):
Retirement benefits adjustment.........................................................................
Cumulative translation adjustment.....................................................................
Unrealized loss on derivatives ...........................................................................
Unrealized gain on investments. ........................................................................
Accumulated other comprehensive income (loss) ..........................................
Total Deere & Company stockholders’ equity .........................................................
Noncontrolling interests ........................................................................................
Total stockholders’ equity .............................................................................
Total Liabilities and Stockholders’ Equity ......................................................
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. The “Equipment Operations” reflect the basis of consolidation described in
Note 1 to the consolidated financial statements. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at
the consolidated financial statements.
55
31. SUPPLEMENTAL CONSOLIDATING DATA (continued)
STATEMENT OF CASH FLOWS
For the Years Ended October 31, 2011, 2010 and 2009
(In millions of dollars)
Cash Flows from Operating Activities
Net income................................................................................
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables ...........................................
Provision for depreciation and amortization.............................
Goodwill impairment charges .................................................
Undistributed earnings of unconsolidated subsidiaries
and affiliates .....................................................................
Provision (credit) for deferred income taxes ............................
Changes in assets and liabilities:
Receivables ......................................................................
Inventories ........................................................................
Accounts payable and accrued expenses ...........................
Accrued income taxes payable/receivable ..........................
Retirement benefits ...........................................................
Other ....................................................................................
EQUIPMENT OPERATIONS*
2011
2010
2009
_________
_________
_________
FINANCIAL SERVICES
2011
2010
2009
________
________
________
$ 2,807.8
$
Net cash provided by operating activities........................
Cash Flows from Investing Activities
Collections of receivables (excluding trade and wholesale) ..........
Proceeds from maturities and sales of marketable securities .......
Proceeds from sales of equipment on operating leases ...............
Government grants related to property and equipment ................
Proceeds from sales of businesses, net of cash sold ...................
Cost of receivables acquired (excluding trade and wholesale) ......
Purchases of marketable securities ............................................
Purchases of property and equipment ........................................
Cost of equipment on operating leases acquired .........................
Increase in investment in Financial Services................................
Acquisitions of businesses, net of cash acquired .........................
Increase in trade and wholesale receivables ...............................
Other ........................................................................................
$
1,874.4
$
873.1
471.0
$
372.4
$ 202.3
4.5
587.0
6.3
548.7
27.2
35.3
516.2
289.2
9.0
401.5
100.1
424.6
196.5
409.0
(118.8)
(278.3)
(156.7)
74.8
(195.1)
83.2
(1.0)
110.2
(.9)
100.2
(.5)
88.4
(109.5)
(1,281.8)
1,027.0
45.3
483.2
(168.0)
(333.0)
(647.7)
1,062.9
6.5
(140.1)
221.6
325.9
773.0
(1,127.2)
(247.0)
(25.7)
123.7
(5.6)
1.2
351.3
(44.1)
12.1
(245.0)
5.7
15.6
(14.0)
276.1
18.1
12.9
(2.1)
(29.2)
2,998.4
2,544.9
1,424.6
1,065.0
1,274.2
896.6
803.4
13,333.1
32.2
683.4
12,287.7
38.4
621.9
92.3
12,399.0
21.7
477.3
(15,365.9)
(83.8)
(2.4)
(1,230.5)
(13,681.6)
(63.4)
(26.2)
(1,098.4)
(12,155.4)
(22.0)
(118.7)
(834.4)
(8.3)
(838.8)
18.3
(151.0)
52.8
.3
911.1
34.9
(503.1)
(1,054.3)
(735.5)
(7.6)
(788.0)
(69.0)
(60.8)
(43.8)
(37.2)
(60.0)
(49.8)
(79.5)
(32.9)
(20.7)
(561.8)
(35.7)
(855.3)
(814.5)
(122.7)
(3,231.4)
(2,658.1)
(330.7)
230.8
(552.6)
69.0
(11.5)
170.0
(1,667.0)
(127.9)
(1,229.9)
305.0
(311.5)
129.1
(358.8)
(52.2)
550.9
1,384.8
(75.6)
16.5
(3.2)
(456.9)
552.6
5,586.0
(3,209.3)
883.9
1,229.9
2,316.0
(3,364.2)
(1,332.6)
(550.9)
4,898.0
(3,754.7)
(483.5)
43.5
(20.7)
(473.4)
4.6
(25.8)
69.0
(340.1)
43.8
(217.2)
60.0
(593.1)
70.1
(17.3)
(20.6)
(116.1)
Net cash provided by (used for) financing activities .........
(2,301.6)
(2,054.7)
1,326.6
2,170.1
871.6
(796.3)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents ........................................................
(2.3)
(17.2)
26.7
13.7
(7.3)
15.5
Net Increase (Decrease) in Cash and Cash Equivalents .....
Cash and Cash Equivalents at Beginning of Year ................
(160.8)
3,348.3
(341.5)
3,689.8
2,655.2
1,034.6
17.4
442.3
(519.6)
961.9
(214.9)
1,176.8
3,187.5
$ 3,348.3
$ 3,689.8
442.3
$ 961.9
Net cash used for investing activities .............................
Cash Flows from Financing Activities
Increase (decrease) in total short-term borrowings......................
Change in intercompany receivables/payables ............................
Proceeds from long-term borrowings..........................................
Payments of long-term borrowings .............................................
Proceeds from issuance of common stock ..................................
Repurchases of common stock ..................................................
Capital investment from Equipment Operations ...........................
Dividends paid ...........................................................................
Excess tax benefits from share-based compensation ..................
Other ........................................................................................
Cash and Cash Equivalents at End of Year...........................
$
(31.2)
$
459.7
$
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. The “Equipment Operations” reflect the basis of consolidation described in
Note 1 to the consolidated financial statements. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive
at the consolidated financial statements.
56
DEERE & COMPANY
SELECTED FINANCIAL DATA
(Dollars in millions except per share amounts)
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Net sales and revenues ...................................... $32,013
$26,005
$ 23,112
$28,438
$24,082
$22,148
$ 21,191
$19,204
$14,856
$13,296
Net sales ........................................................... 29,466
23,573
20,756
25,803
21,489
19,884
19,401
17,673
13,349
11,703
Finance and interest income ..............................
1,923
1,825
1,842
2,068
2,055
1,777
1,440
1,196
1,276
1,339
Research and development expenses .................
1,226
1,052
977
943
817
726
677
612
577
528
Selling, administrative and general expenses ......
3,169
2,969
2,781
2,960
2,621
2,324
2,086
1,984
1,623
1,546
Interest expense ................................................
759
811
1,042
1,137
1,151
1,018
761
592
629
637
Income from continuing operations* ...................
2,800
1,865
873
2,053
1,822
1,453
1,414
1,398
620
296
Net income* ......................................................
2,800
1,865
873
2,053
1,822
1,694
1,447
1,406
643
319
Return on net sales............................................
9.5%
7.9%
4.2%
8.0%
8.5%
8.5%
7.5%
8.0%
4.8%
2.7%
Return on beginning Deere & Company
stockholders’ equity ...................................... 44.5%
38.7%
13.4%
28.7%
24.3%
24.7%
22.6%
35.1%
20.3%
8.0%
Income per share from
continuing operations – basic* ....................... $ 6.71
– diluted* .....................
6.63
$ 4.40
4.35
$ 2.07
2.06
$ 4.76
4.70
$ 4.05
4.00
$ 3.11
3.08
$ 2.90
2.87
$ 2.82
2.76
$ 1.29
1.27
$
.62
.61
Net income per share – basic* ...........................
– diluted* .........................
6.71
6.63
4.40
4.35
2.07
2.06
4.76
4.70
4.05
4.00
3.63
3.59
2.97
2.94
2.84
2.78
1.34
1.32
.67
.66
Dividends declared per share .............................
Dividends paid per share....................................
1.52
1.41
1.16
1.14
1.12
1.12
1.06
1.03
.91
.851/2
.78
.74
.601/2
.59
.53
.50
.44
.44
.44
.44
Average number of common
shares outstanding (in millions) – basic ..........
– diluted ........
417.4
422.4
424.0
428.6
422.8
424.4
431.1
436.3
449.3
455.0
466.8
471.6
486.6
492.9
494.5
506.2
480.4
486.7
476.4
481.8
Total assets ....................................................... $ 48,207
$ 43,267
$ 41,133
$ 38,735
$ 38,576
$ 34,720
$ 33,637
$ 28,754
$26,258
$ 23,768
Trade accounts and notes receivable – net .........
3,295
3,464
2,617
3,235
3,055
3,038
3,118
3,207
2,619
2,734
11,233
9,974
9,068
Financing receivables – net................................
19,924
17,682
15,255
16,017
15,631
14,004
12,869
Financing receivables securitized – net ...............
2,905
2,238
3,108
1,645
2,289
2,371
1,458
Equipment on operating leases – net ..................
2,150
1,936
1,733
1,639
1,705
1,494
1,336
1,297
1,382
1,609
Inventories ........................................................
4,371
3,063
2,397
3,042
2,337
1,957
2,135
1,999
1,366
1,372
Property and equipment – net ............................
4,352
3,791
4,532
4,128
3,534
2,764
2,343
2,138
2,064
1,985
Short-term borrowings:
Equipment operations ....................................
Financial services ..........................................
528
6,324
85
5,241
490
3,537
218
6,621
130
7,495
282
5,436
678
4,732
312
3,146
577
3,770
398
4,039
3,458
4,347
4,437
Total .........................................................
6,852
5,326
4,027
6,839
7,625
5,718
5,410
Short-term securitization borrowings:
Financial services ..........................................
2,777
2,209
3,132
1,682
2,344
2,403
1,474
Long-term borrowings:
Equipment operations ....................................
Financial services ..........................................
3,167
13,793
3,329
13,486
3,073
14,319
1,992
11,907
1,973
9,825
1,969
9,615
2,423
9,316
2,728
8,362
2,727
7,677
2,989
5,961
Total ......................................................... 16,960
16,815
17,392
13,899
11,798
11,584
11,739
11,090
10,404
8,950
6,800
6,290
4,819
6,533
7,156
7,491
6,852
6,393
4,002
3,163
Book value per share* ........................................ $ 16.75
$ 14.90
$ 11.39
$ 15.47
$ 16.28
$ 16.48
$ 14.46
$ 12.95
$ 8.22
$
6.62
Capital expenditures .......................................... $ 1,050
$
$
767
$ 1,117
$ 1,025
$
$
$
$
$
358
51,262
56,653
52,022
Total Deere & Company stockholders’ equity ......
Number of employees (at year end) .................... 61,278
795
55,650
774
46,549
512
47,423
364
46,465
313
43,221
43,051
* Attributable to Deere & Company.
57
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of company stockholders will be held
at 10 a.m. CT on February 29, 2012, at the Deere & Company
World Headquarters, One John Deere Place, Moline, Illinois.
TRANSFER AGENT & REGISTRAR
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other inquiries, including those concerning lost, stolen or
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Deere & Company
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Pittsburgh, PA 15252-8015
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P.O. Box 358015
Pittsburgh, PA 15252-8015
CORPORATE LEADERSHIP
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STOCK EXCHANGES
Deere & Company common stock is listed on the New York
Stock Exchange under the ticker symbol DE.
FORM 10-K
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written request to Deere & Company Stockholder Relations.
AUDITORS
Deloitte & Touche LLP
Chicago, Illinois
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Vice President, Global Human Resources
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Vice President, Labor Relations
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Corporate Secretary and Associate General Counsel
* Effective 1/1/12, Thomas C. Spitzfaden succeeds Dennis R. Schwartz
as Vice President, Pension Fund & Investments.
Figures in parentheses represent complete years of company
service through 12/31/11 and assignments as of that date.
58
Unless otherwise indicated, all capitalized names of products and
services are trademarks or service marks of Deere & Company.
The 175th anniversary of the founding of John Deere is a time to connect the pride of
the past with the promise of the future. Our heritage is rich. Our achievements are many.
Our future is bright. Guided by an ambitious plan for global growth, we aim to seize the
great opportunities that lie ahead, based on the world’s growing need for food, shelter and
infrastructure. John Deere’s goal is to capitalize on these positive trends in order to deliver
increasing value to our customers, investors and other constituents in the years ahead.
BOARD OF DIRECTORS
From left: David B. Speer, Aulana L. Peters, Thomas H. Patrick, Richard B. Myers, Joachim Milberg, Samuel R. Allen, Clayton M. Jones,
Dipak C. Jain, Charles O. Holliday, Jr., Vance D. Coffman and Crandall C. Bowles; shown at the John Deere Pavilion, Moline, Illinois,
with a sculpture of a John Deere combine made of canned and packaged foods that were later donated to area food pantries.
The Deere senior management team shown with replica of founder John Deere’s first 1837 plow and company’s new S690 Combine,
one of the world’s most advanced harvesters. From left, Dave Everitt, Mike Mack, Jim Jenkins, Sam Allen, Jean Gilles, Jim Field, Mark von Pentz, and Jim Israel.
Net Sales and Revenues (MM)
$23,112
2009
$26,005
2010
$32,013
2011
Operating Profit (MM)
$1,607
2009
$3,408
2010
Net Income *(MM)
$4,564
2011
$873
2009
$1,865
2010
$2,800
2011
*Net income attributable to Deere & Company
SAMUEL R. ALLEN (2)
Chairman and Chief Executive Officer
Deere & Company
DIPAK C. JAIN (9)
Dean, INSEAD
business education
CRANDALL C. BOWLES (15)
Chairman, Springs Industries, Inc.
Chairman, The Springs Company
home furnishings
CLAYTON M. JONES (4)
Chairman, President and Chief Executive Officer
Rockwell Collins, Inc.
aviation electronics and communications
VANCE D. COFFMAN (7)
Retired Chairman
Lockheed Martin Corporation
aerospace, defense and information technology
JOACHIM MILBERG (8)
Chairman, Supervisory Board
Bayerische Motoren Werke (BMW) AG
motor vehicles
CHARLES O. HOLLIDAY, JR. (4)
Chairman of the Board
Bank of America Corporation
banking, investing and asset management
RICHARD B. MYERS (5)
Retired Chairman, Joint Chiefs of Staff
Retired General, United States Air Force
principal military advisor to the President, the
Secretary of Defense, and the National Security Council
Figures in parentheses represent complete years of board
service through 12/31/11 and positions as of that date.
THOMAS H. PATRICK (11)
Chairman
New Vernon Capital, LLC
private equity fund
AULANA L. PETERS (9)
Retired Partner
Gibson, Dunn & Crutcher LLP
law firm
DAVID B. SPEER (3)
Chairman and Chief Executive Officer
Illinois Tool Works Inc.
engineered components,
industrial systems and consumables
(Not pictured: Elected 12/7/11)
SHERRY M. SMITH
Executive Vice President and Chief Financial Officer
SUPERVALU INC.
grocery
Deere & Company
One John Deere Place
Moline, Illinois 61265
(309) 765-8000
www.JohnDeere.com
Deere & Company
Annual Report 2011
DEERE & COMPANY ANNUAL REPORT 2011
“I will never put my name
on a product that does not have in it
the best that is in me.”
— John Deere
Medallion created to celebrate
the company’s centennial in 1937.
COMMITTED TO THOSE LINKED TO THE LAND